Last week, in a blistering opinion, U.S. District Court Judge Ronnie Abrams took the SEC to task for its “neither admit nor deny” settlement policy. This excerpt provides a sense of the opinion’s tone & the judge’s concerns about the 1st Amendment implications of the SEC’s “gag orders”:
By preventing defendants from publicly defending themselves, or even criticizing the SEC’s handling of the case (thereby “creating the impression” that the Commission sanctioned them without basis), the Provision denies the public the opportunity to scrutinize the government’s enforcement practices. Indeed, the very people who are arguably “in the best position to know” of governmental abuse, Bd. of Cnty. Comm’rs v. Umbehr, 518 U.S. 668, 674 (1996)—that is, those who have been subjected to the SEC’s enforcement actions—are those who are muzzled by the Provision from speaking out. “Only one thing is left certain: the public will never know whether the S.E.C.’s charges are true.” Vitesse Semiconductor, 771 F. Supp. 2d at 309. While this “might be defensible if all that were involved was a private dispute between private parties,” id., here, the Provision is used by an agency of the federal government to shield itself from public view.
Citing New York Times v. Sullivan, Judge Abrams said that this is precisely the kind of societal harm that the 1st Amendment was intended to protect against: “The dominant purpose of the First Amendment was to prohibit the widespread practice of governmental suppression of embarrassing information . . . . Secrecy in government is fundamentally anti-democratic, perpetuating bureaucratic errors. Open debate and discussion of public issues are vital to our national health.”
Given this fire & brimstone, you might be surprised to learn that the judge approved the proposed settlement – although both parties requested that he do so. However, that highlights the larger issue of how the procedural posture of cases where the SEC’s settlement policy is challenged limits a court’s ability to address that policy. This Proskauer blog says that recent 2nd Circuit and 5th Circuit decisions illustrate that point:
Both decisions turned at least in part on the very narrow bases available for relief from a judgment under Federal Rule of Civil Procedure 60(b). And Novinger turned entirely on that ground. Two of the three judges concurred in the judgment affirming denial of relief, but expressly noted (in an opinion by Judge Edith Jones) that nothing in the court’s unanimous ruling “approves of or acquiesces in the SEC’s longstanding policy that conditions settlement of any enforcement action on parties’ giving up First Amendment rights.”
To the contrary, the two concurring judges opined that “[a] more effective prior restraint is hard to imagine.” The concurring judges also noted that a petition to review and revoke the SEC’s policy had been filed nearly four years ago, but the SEC has not yet responded to it. “Given the agency’s current activism, I think it will not be long before the courts are called on to fully consider this policy.”
The blog goes on to note that the SEC’s neither admit nor deny policy was attack in a different context, courts might well “take a different view of the relevant arguments.” Of course, be careful what you wish for – because the blog also points out SEC may be currently inclined to seek more admissions, rather than gag orders, as a condition of settlement.
According to a recent BDO survey of nearly 250 public company directors, 57% said that oversight of ESG matters falls to the Nominating and Governance Committee, while only 13% of directors surveyed said that their companies have a separate ESG Committee. This excerpt indicates that when it comes to having a standing ESG Committee, size matters – and that other standing board committees often find ESG issues ending up on their plate:
In 2021, more than one-third of directors (35%) said they planned to create an ESG-specific committee during the next three years. As of now, just 13% indicated they have done so. Boards with smaller market capitalization (81% of our survey respondents sit on at least one board with small or micro-sized stock shares) may not have the resources or incentives to create a separate ESG committee. By comparison, approximately 31% of the S&P 100 have a separate ESG committee of the board.
Whether or not a dedicated ESG committee exists, ESG factors touch various committees across the board. For example, we increasingly see the compensation committee getting involved in many more human capital matters beyond compensation packages for the CEO and executive team. In many cases, we see boards changing the names of their committees to reflect the expanding duties to consider employee needs more broadly.
Liz recently blogged about the SEC’s announcement of an April 13, 2023 deadline for the transition to electronic Form 144 filings. This Perkins Coie blog has some practical advice on what companies should be doing in advance of that deadline to prepare for electronic filings – whether or not they plan to continue to rely on brokerage firms to make Form 144 filings for their affiliates. This excerpt discusses the need to come up with filing procedures for your company, your affiliates and their brokers:
Come up with a plan for how to handle Form 144 filings so they don’t slip through the cracks:
– Will you try to mandate that your insiders’ brokers continue to make the Form 144 filings on behalf of your insiders?
– Do you want to take on the responsibility for filing these forms to ensure they get filed on time and correctly?
– Consider whether your existing insider trading policy currently requires your insiders to pre-clear all transactions, and if not, whether you should recommend adding that feature as a way to help your insiders remember to provide you with advance notice of any contemplated sales so that you can prepare and timely file the Form 144.
Whatever your plan is, communicate it to all relevant parties so everyone is on the same page before this new requirement kicks in six months from now
The blog also addresses a number of other topics, including the need to obtain EDGAR codes for some affiliates that may not already have them, and the need to communicate with your affiliates and their brokers about filing responsibilities.
Back in August, I blogged about an upcoming FASB proposal to tweak segment disclosures. Earlier this month, FASB issued its proposed ASU laying out the details of the changes it wants to make. This excerpt from FASB’s press release summarizes those proposed changes:
The amendments in the proposed ASU respond to feedback received from investors and other allocators and would improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The key amendments in the proposed ASU would:
1. Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss.
2. Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed and each reported measure of segment profit or loss.
3. Require that a public entity provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280, Segment Reporting, in interim periods.
4. Clarify that if the CODM uses more than one measure of a segment’s profit or loss, at least one of the reported segment profit or loss measures (or the single reported measure if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in a public entity’s consolidated financial statements.
5. Require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the proposed ASU and all existing segment disclosures in Topic 280.
The amendments would apply to all public companies that are required to report segment information. Fortunately, however, they would not change how those companies identify their operating segments, aggregate those operating segments, or apply the quantitative thresholds to determine reportable segments. FASB’s deadline for comments on the proposal is December 20, 2022.
Turbulent market conditions have made this a tough year for many public companies looking for additional financing. This Cooley blog explores two alternative methods of financing that may be attractive options for some of those companies – PIPEs and Registered Direct Offerings (RDOs). This excerpt discusses underwritten and non-underwritten RDOs:
Non-Underwritten RDOs. In non-underwritten RDOs, the issuer sells the securities directly to the investor in a share purchase agreement (SPA), just as in a PIPE. The primary differentiating factor relative to a PIPE is that the securities are sold pursuant to an effective registration statement, meaning that they are unrestricted and freely tradable out of the gate.
As a result, an RDO is conducted as a fully documented deal – a prospectus supplement, comfort letters and 10b-5 letters from multiple law firms all have the potential to increase legal and auditor costs, as compared to the relatively leaner PIPE. The RDO also requires having an effective registration statement or the ability to a file an automatically effective registration statement (i.e., be a well-known, seasoned issuer).
Underwritten RDOs. The primary difference between an underwritten and non-underwritten RDO is that the shares in an underwritten offering will settle through the banking syndicate instead of directly with third-party investors. The deal is marketed and conducted just like a non-underwritten RDO, with the banks wall-crossing investors and the shares being taken down off an effective S-3 shelf. But instead of the company contracting directly with investors through an SPA, the deal is papered on an underwriting agreement, with the banks purchasing the share block and settling onwards to their accounts.
The blog points out that although there are many similarities between PIPEs and RDOs, the advantage of the latter is the issuer’s ability to avoid the illiquidity discount associated with a PIPE by issuing registered shares to RDO investors.
Now that the Twitter case is over, we can all turn our attention to the things in Delaware corporate law that really matter to us. Francis Pileggi recently provided a reminder about one of them:
The Delaware Court of Chancery prefers “stockholder” as the term uniformly used in the Delaware General Corporation Law for those owning a corporation, though in the past, especially prior to the 2010 DGCL amendments, there were inconsistent references–and court decisions in the past have not always been scrupulous in observing the distinction. See generally In Re Adams Golf Shareholder Litigation, C.A. No. 7354-VCL, transcript (Del. Ch. Oct. 3, 2012) (yes, that’s 10 years ago.)
Does this matter? Well, kind of, I suppose. But I think we lawyers all have a tendency to get a little goofy about this type of thing. For example, I used to have a partner who would absolutely freak out when he saw accountants use the term “common stock” in an Ohio corporation’s financial statements (we’re a “common shares” jurisdiction).
Once, my former colleague was so flummoxed by an accounting firm’s repeated sloppiness in this area that he wrote a letter to the partner at the firm correcting him. This has gone down in firm lore as the “red birds/blue birds” letter. That’s because, in explaining the distinction between common stock and common shares to the accountant, he said something like “there are red birds and blue birds, but although they are both birds, red birds aren’t blue birds, and blue birds aren’t red birds.”
We were subsequently working on an IPO in another city with an accountant from this same firm. One of the other lawyers made a comment about common stock and common shares, and the accountant made the correction and then smiled and said something about how only lawyers care. He then said “Oh, you know there’s this letter that’s been passed around our firm for years that some crazy lawyer wrote about red birds not being blue birds. . .” I didn’t have the heart to tell my colleague of his notoriety among multiple offices of a Big 4 accounting firm.
Today is our “19th Annual Executive Compensation Conference” – Wednesday & Thursday were our “2022 Proxy Disclosure Conference.” Both conferences are paired together and they’ll also be archived for attendees until next August. If you missed these conferences or our “1st Annual Practical ESG Conference” but want to purchase access to the archives, email sales@ccrcorp.com – and we’ll also have a link available soon on this page to do that. Here’s more info for people who are attending:
– 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, then follow the “Proxy Disclosure/Exec Comp” tab to see the agenda for today, 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. Here’s today’s agenda.
If you are experiencing a technical issue on our conference platform and need assistance, please email Evan Blake (eblake@markeys.com) with our Event Manager Victoria Newton (vnewton@ccrcorp.com) on copy, and they will reply to you asap. If you have any other questions about accessing the conference, please email our Event Manager, Victoria Newton (vnewton@ccrcorp.com).
– How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who have registered for the Conferences will be able to access the conference archives on these sites using their existing login credentials beginning about a week after the event, and unedited transcripts will be available to these members on TheCorporateCounsel.net and CompensationStandards.com beginning about 2-3 weeks after the event. If you’ve registered for the conferences through CCRcorp but are not a member, we will send login information to access the conference footage and transcripts on TheCorporateCounsel.net or CompensationStandards.com.
If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP.
– How to Earn CLE Online: We are applying for up to 15 hours of CLE credit for the Proxy Disclosure & Executive Compensation Conferences in applicable states – approvals of actual credit vary based on each state. Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
– Thanks To Our Sponsors! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Our Platinum Sponsor for the Proxy Disclosure & 19th Annual Executive Compensation Conference is Morrison Foerster, and our Silver Sponsor is Argyle, who also sponsored our 1st Annual Practical ESG Conference this week. Please visit their pages!
You can still register to view today’s event and get on-demand archive access to all of the Proxy Disclosure and Executive Compensation Conference from this week! Email sales@ccrcorp.com or call 1-800-737-1271, Option 1. Archives and transcripts will be available on-demand until July 31, 2023, to help you navigate challenging proxy season issues.
Investor activist Jim McRitchie recently filed a breach of fiduciary lawsuit against Meta in which he contends that in a system that emphasizes stockholder primacy, the directors’ fiduciary duties must consider the impact of the company’s actions on the diversified portfolios of its investors. As the complaint puts it, “if the decisions that maximize the Company’s long-term cash flows also imperil the rule of law or public health, the portfolios of its diversified stockholders are likely to be financially harmed by those decisions.” This excerpt from the complaint summarizes the theory of the case:
For a corporation whose impact is so widespread, the well-established doctrine of stockholder primacy cannot be rationally applied on behalf of investors without recognizing the impact of portfolio theory, which inextricably links common stock ownership to broad portfolio diversification. The economic benefits from—indeed the viability of—a system of corporate law rooted in maximizing financial value for stockholders would vanish if it forced directors to make decisions that increased corporate value but depressed portfolio values for most of its stockholders. But this is precisely how the Company has operated: Defendants have ignored the interests of all of its diversified stockholders, making decisions as if the costs that Meta imposes on such portfolios were not meaningful to stockholder
I can’t imagine that this argument is going to get any traction with the Delaware Chancery Court – and as UCLA’s Stephen Bainbridge has pointed out, it isn’t the first time someone has made this kind of argument. Bainbridge also notes the fundamental problems with the workability of such a standard:
I am dubious about whether managers have the training or expertise to manage a company in the interests of diversified investors at large. Suppose managers have come up with an idea for a new product. Do we really think they can–or should–evaluate whether selling the new product would injure competitors and thus be adverse to the interests of diversified investors?
My guess is that proponents of this fiduciary duty theory would likely respond that the BJR would continue to apply to the board’s ordinary course business decisions. As illustrated by Sarah Murphy’s comments in an interesting exchange with Doug Chia on LinkedIn, they appear to be making a more broadly focused argument:
The board’s job is to optimize value for the benefit of shareholders, but if most shareholders are diversified (as they are in public markets), then a value-maximization strategy that relies on externalizing costs that diversified portfolios internalize is clearly not “for the benefit” of those shareholders. As the plaintiff’s lawyer says, “Investment theory and the law governing investment fiduciaries is built around the importance of diversification, and we think it essential that the law governing corporate fiduciaries acknowledge that reality.”
For a more in-depth explication of this argument, check out Jim McRitchie’s blog. Anyway, “externalized costs” are those that are generated by a particular enterprise but carried by society as a whole, and to me, that makes corporate law the wrong mechanism to use in sorting them out. It seems to me that issues about how to handle the social costs associated with business are best addressed through the political and regulatory process, not through corporate law concepts of fiduciary duty.
Gunster’s Bob Lamm recently blogged about an issue that he’s reluctantly concluded needs to be on the board’s agenda – human trafficking. Here’s his reasoning:
There is a strong case to be made why businesses need to work on [human trafficking’s] elimination, but we need to make that case. One of the key components of that case should be apparent to us all; can you say “supply chain”? As boards increasingly take deep dives into how their companies address supply chain challenges, they should ask questions about the components of their supply chains: Where are goods coming from? Are they the products of forced labor? Child labor? If that doesn’t move a board, how about reputation? How would the company’s investors, employees, customers, and others react if they learned that its products are produced by women who are virtually enslaved, making far less than what we euphemistically call “subsistence wages”? How would that play out in the media?
Just how serious an issue human trafficking is was brought home to me when Cleveland hosted the 2016 Republican National Convention. A friend of mine was working for one of our economic development groups and attended a presentation that the FBI gave to downtown hotel operators about the potential human trafficking issues that surround any large destination event. The presentation was, in his words, “sobering.” Directors have a lot on their plates, but Bob makes a good case that this is another issue that like needs board-level attention.
Today is the second day of our “2022 Proxy Disclosure Conference” – tomorrow is our “19th Annual Executive Compensation Conference.” Here’s more info:
– 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 “Proxy Disclosure/Exec Comp” tab to see the agendas for each day, 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. Here’s today’s agenda.
If you are experiencing a technical issue on our conference platform and need assistance, please email Evan Blake (eblake@markeys.com) with our Event Manager Victoria Newton (vnewton@ccrcorp.com) on copy, and they will reply to you asap. If you have any other questions about accessing the conference, please email our Event Manager, Victoria Newton (vnewton@ccrcorp.com).
– How to View Archives & Transcripts: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives on these sites using their existing login credentials beginning about a week after the event, and unedited transcripts will be available to these members on TheCorporateCounsel.net and CompensationStandards.com beginning about 2-3 weeks after the event. If you’ve registered for the conferences through CCRcorp but are not a member, we will send login information to access the conference footage and transcripts on TheCorporateCounsel.net or CompensationStandards.com.
If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP.
– How to Earn CLE Online: We are applying for up to 15 hours of CLE credit for the Proxy Disclosure & Executive Compensation Conferences in applicable states – approvals of actual credit vary based on each state. Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
– Thanks To Our Sponsors! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Our Platinum Sponsor for the Proxy Disclosure & 19th Annual Executive Compensation Conference is Morrison Foerster, and our Silver Sponsor is Argyle, who also sponsored our 1st Annual Practical ESG Conference this week. Please visit their pages!
It is not too late to register for our Conferences today! You can sign up for today’s “2022 Proxy Disclosure Conference” and tomorrow’s “19th Annual Executive Compensation Disclosure Conference” by emailing sales@ccrcorp.com or by calling 1-800-737-1271, Option 1. If you have missed any of the Conference, archives and transcripts will be available on-demand afterwards!
