Recently, I blogged about the SCOTUS’s decision to deny cert in a case challenging the constitutionality of the SEC’s “neither admit nor deny” settlement policy. On the heels of that decision, the 5th Circuit held last week that appellants who entered into a settlement with the SEC that included this language weren’t entitled to relief from the judgment confirming it. The appellants contended that the settlement was void to the extent that it incorporated the no-deny policy, which they claimed violated the First Amendment and denied them due process. Here’s an excerpt from the Jim Hamilton Blog’s discussion of the case:
The U.S. Court of Appeals for the Fifth Circuit affirmed the Texas District Court’s holding that the SEC’s 1972-initiated no-deny policy included in the defendants’ signed 2016 settlement agreement with the Commission did not void the judgment on constitutional grounds under Federal Civil Procedure Rules 60(b)(4) or (5). The court of appeals declared that Rule 60(b)(4) or (5) would void the settlement on due process or First Amendment grounds only if either the lower court did not properly have personal or subject matter jurisdiction over the defendants or the defendants were not provided actual notice of the case or an opportunity to be heard, all of which were proper and not contested by either party in 2016.
The 5th Circuit hasn’t exactly championed the SEC’s authority in recent months, so this result may look a little surprising. But the blog says that there may be another shoe yet to drop, because the two concurring judges said that the decision doesn’t address the policy’s merits, and that in light of the SEC’s current activism, it or another court may be “called upon in the near future to decide whether the policy remains or is struck down.”
After several years of increasingly bad news when it comes to D&O premiums, a recent NACD blog post by Marsh’s US D&O Product Lead Matthew McLellan says that things are looking up for companies looking to purchase coverage. Here’s the intro:
For the first time in four years, it is likely that an increasing number of public companies will, on average, experience a year-over-year decrease in their US directors’ and officers’ liability (D&O) insurance premiums in the second half of 2022. Material premium increases have become increasingly rare, and there is a dramatic return to competition in the marketplace as insurers look for new sources of revenue.
Despite a return to competition, the underwriting community remains focused on several risk areas including legal and regulatory trends; activist investors; environmental, social, and governance (ESG) issues; and other challenges that could lead to litigation. Companies should optimize opportunities, but also remain vigilant in their renewal preparations, and work with their brokers to carry out comprehensive reviews of policies and obtain the broadest coverage possible.
The blog goes on to discuss the risks that companies and insurers are confronting, which include stock market volatility, supply chain issues, inflation, heightened cyber threats, continuing high levels of shareholder litigation, and SEC proposals on climate & cybersecurity disclosure are likely to prompt greater regulatory scrutiny. In an environment where risks are increasing but premiums are at least temporarily easing, the blog suggests that companies should focus on optimizing the structure and coverage amounts provided by their D&O insurance programs.
Yesterday, the SEC announced that Jaime Lizárraga had been sworn in as an SEC commissioner to serve a term that expires on June 5, 2027. Commissioner Lizárraga fills the open Democratic seat created by Commissioner Lee’s recent departure. His inauguration follows on the heels of Mark Uyeda’s, who was sworn in on June 30, 2022 for a term expiring on June 5, 2023. Commissioner Uyeda fills the vacant Republican seat created when Commissioner Roisman left.
With the addition of Commissioner Lizárraga, the SEC has its full allotment of five commissioners, which is a place that it hasn’t been all that frequently in recent years.
With many companies filing their second quarter 10-Qs in the upcoming weeks, this Goodwin memo on updating risk factors in a 10-Q is particularly timely. The memo refers to what it characterizes as “better practices” when it comes to updating. This excerpt addresses whether companies that repeat their entire “Risk Factors” section should highlight changes to a particular risk factor:
If a company chooses to update its risk factor disclosure by restating the entire risk factor section from its Form 10-K report or a subsequent Form 10-Q report, we recommend that the company consider whether it would be better to highlight the changes in some manner that makes it more likely that the changes will come to the attention of readers. We believe that this is particularly relevant where the risk factor disclosure extends to several pages or more, which could have the unintended effect of making it difficult for readers to find and absorb the new disclosure about material changes.
Changes could be identified in various ways, such as in an introductory paragraph that refers readers to specific updated paragraphs, by use of footnotes, by use of bold text, or by use of symbols such as an asterisk at the beginning and end of each paragraph that contains changed or new text (which was the way the SEC’s EDGAR system marked changed text in the past).
Other topics addressed include whether to comply with Item 105 of S-K’s requirements (including a risk factors summary for Risk Factors sections exceeding 15 pages) in a 10-Q and issues associated with hypothetical risk factors. The memo also provides a bullet-point list of recent developments that might prompt companies to update risk factors disclosure in their upcoming 10-Q filings.
Cooley’s Cydney Posner recently blogged about on whether companies are making progress in efforts to improve the racial and ethnic diversity of their boards. She cites ISS data indicating that while progress has been made, companies still have a long way to go. Here’s an excerpt from Cydney’s blog on where things stand with the S&P 500:
ISS reports that, in 2022, all boards of companies in the S&P 500 had at least one director that identified as racially or ethnically diverse; in comparison, in 2020, 11% of boards in the S&P 500 had no racially or ethnically diverse directors. In addition, in 2022, 36% had three racially or ethnically diverse board members, compared to 22% in 2020. Similarly, in 2022, 31% had four racially or ethnically diverse board members, compared to only 7% in 2020—an increase of 24 percentage points. The percentage of board seats held by racially or ethnically diverse directors grew from 19% in 2020 to 23% in 2022.
There were, however, differences among different races and ethnicities. For example, persons identifying as Hispanic/Latin American constituted up 18.5% of the U.S. population (according to the April 1, 2020 census), but held only 4% of S&P 500 board seats in 2020 and only 5% in 2022. African-Americans held 9% in 2020 and 12% in 2022; Asians held 5% in 2020 and 6% in 2022.
Russell 3000 companies have also made some progress. The good news is that in 2020, 38% of Russell 3000 companies had no racial or ethnically diverse board members, but that only 10% lacked racial or ethnically diverse directors. The percentage of companies with two or more racially/ethnically diverse directors rose from 29% in 2020 to 55% in 2022 & the percentage of board seats held by racially or ethnically diverse directors grew from 11% in 2020 to 16% in 2022.
Despite this progress, ISS says that diversity efforts still have a long way to go if boards are to “reflect the diversity of their customer base or the demographics of the broader society in which they operate.” It also points out that the long-term trajectory of board diversity initiatives remains to be seen.
I’ve blogged several times about the Musk-Twitter goofiness over on DealLawyers.com. You folks have been spared so far – but your luck has just run out. That’s because the WSJ reported that a recently released comment letter indicates that the Staff questioned whether Musk’s post-signing tweet about his supposed concerns with the number of bot accounts that included the phrase ““[t]his deal cannot move forward” triggered a requirement to amend his 13D filing.
Personally, I think the headline – “SEC Broadens Inquiry Into Elon Musk’s Disclosures” is a little misleading. The Staff’s concerns here are pretty narrowly focused & I don’t think I’d say that the SEC is “broadening” its inquiry, but don’t take my word for it – here’s the response letter from Musk’s lawyers, so you can judge for yourself. In any event, this back & forth with the Staff is a reminder of the perils of negotiating on social media.
Last week, the SEC announced the filing of an insider trading enforcement proceeding with allegations that sounded very familiar:
The SEC’s complaint, filed in federal district court in the District of Columbia, alleges that in January 2020, NTRP invited Haywood to participate in a registered direct offering of shares. Before being told about the offering, Haywood expressly agreed not to trade on the material, nonpublic information he was about to receive. Notwithstanding this agreement, after receiving information about the offering, Haywood immediately sold more than 100,000 shares of NTRP stock. As alleged in the complaint, NTRP’s stock price dropped nearly 50 percent after the offering was announced. The complaint alleges that Haywood avoid losses of approximately $179,297.
Those allegations – trading after agreeing to keep information about a pending offering confidential – are exactly the same as those brought in the SEC’s complaint against Mark Cuban. That one didn’t go so well for the agency & it will be interesting to see if it fares better in this case.
Rule 14a-8(l) allows companies to decide whether or not to include information in its proxy statement about a proponent (name, address, and number of shares held), but should they? This Perkins Coie blog suggests a couple of reasons why companies should consider disclosing that information:
There is a growing trend of proposals that appear to try to drive votes through using buzzwords that are of interest to certain types of investors, such as greenwashing or diversity – but in fact may espouse views that are the opposite of what a casual reader might think the proposal says. Knowing the identity of the proponent may help investors to better understand the context of the proposal.
There can be other benefits to providing information about proponents as well. Investors might read a proposal from a proponent with 200 shares differently than one from a proponent with 20,000. They might also be interested to know when a proposal has been made by a representative that is in the business of submitting these proposals, and not by the shareholder themselves.
This Goodwin blog reminds everybody that it’s time to conduct the public float calculation that you’ll need to determine your filer status for next year:
For public companies with a calendar year-end, now is the time of year for a company to conduct its public float calculation that will determine its Exchange Act reporting status as an accelerated filer, large accelerated filer, non-accelerated filer, smaller reporting company (SRC), and/or emerging growth company (EGC). The following is a very brief summary of the complex rules that govern filer status and qualification as an SRC or EGC.
For calendar year-end companies, a company’s filing status for Exchange Act reporting purposes is determined based in part on the company’s public float as of the end of the second fiscal quarter. As such, public companies with a calendar-year end should perform their public float calculations as of June 30, 2022 to determine what their filing status will be as of December 31, 2022 so that they can plan their SEC filing calendar accordingly. The filing status will determine the due date for the Form 10-K for the fiscal year ended December 31, 2022, as well as the due dates for the three 10-Qs filed in 2023.
The blog also notes that while public float doesn’t affect eligibility for EGC status, it can indirectly affect termination of EGC status. That’s because if an EGC becomes a large accelerated filer, its EGC status will terminate as of the last day of the current fiscal year.
We wish everyone a safe and happy holiday weekend. We’re off on July 4th & our blogs will be back on Tuesday.
“Most of the big shore places were closed now and there were hardly any lights except the shadowy, moving glow of a ferryboat across the Sound. And as the moon rose higher the inessential houses began to melt away until gradually I became aware of the old island here that flowered once for Dutch sailors’ eyes—a fresh, green breast of the new world. Its vanished trees, the trees that had made way for Gatsby’s house, had once pandered in whispers to the last and greatest of all human dreams; for a transitory enchanted moment man must have held his breath in the presence of this continent, compelled into an aesthetic contemplation he neither understood nor desired, face to face for the last time in history with something commensurate to his capacity for wonder.
And as I sat there brooding on the old, unknown world, I thought of Gatsby’s wonder when he first picked out the green light at the end of Daisy’s dock. He had come a long way to this blue lawn, and his dream must have seemed so close that he could hardly fail to grasp it. He did not know that it was already behind him, somewhere back in that vast obscurity beyond the city, where the dark fields of the republic rolled on under the night.
Gatsby believed in the green light, the orgastic future that year by year recedes before us. It eluded us then, but that’s no matter—tomorrow we will run faster, stretch out our arms further… And one fine morning—
So we beat on, boats against the current, borne back ceaselessly into the past.” – F. Scott Fitzgerald, The Great Gatsby
