Yesterday, the SEC extended the comment period for its controversial climate change disclosure proposal to June 17th. The comment period was scheduled to expire on May 20th, and as Dave blogged a few weeks ago, the SEC has been taking a lot of heat over the relatively brief length of the comment period originally established for the proposal. The SEC’s press release also announced the reopening of the comment period for the SEC’s proposed overhaul of private fund advisor rules & its recent proposal regarding the definition of an “exchange” and amendments to Regulation ATS (Reg ATS). The comment period for these proposals will expire 30 days following publication of the reopening release in the Federal Register.
These latter two proposals – which combined exceed 900 pages – originally provided for a 30-day comment period. As with the climate change proposals, the SEC took some heat here over the length of the original comment period. Check out this rather pointed excerpt from the American Securities Association’s comment letter on the private fund advisors proposal:
The Proposal is just one of the many complex and consequential rulemakings the SEC has proposed in recent months. To date, the SEC has proposed sixteen new rulemakings, in addition to several others that were proposed at the end of 2021. Most of these proposals run to hundreds of pages in length, and often include hundreds of questions that commenters must consider when assessing the impact of potential new rules.
The Proposal itself is 342 pages and includes several very specific questions, some of which hint at further mandates that are not fully explored or analyzed in the release. Yet the SEC provided the public only thirty (30) days to comment on the Proposal. This is simply an inadequate amount of time for the public to properly consider how the contents of the Proposal will affect the U.S. securities markets – particularly when many entities are simultaneously considering and developing comments on over a dozen other rulemakings from the SEC, trying to navigate unprecedented market volatility.
We haven’t covered the Reg ATS proposal here, but crypto-world is freaking out about it, and the ASA submitted an identical critique concerning the length of the comment period for that proposal.
It’s hard to say whether the SEC’s action represents a broad retreat from its recent preference for short comment periods, but it appears that the SEC recognized that adopting short comment periods for these lengthy, intricate & controversial rule proposals wasn’t a good look – and it deserves some credit for the decision to extend them.
I’m sure it won’t escape the watchful eye of conspiracy theorists that the expiration date of the climate change proposal’s comment period now coincides with the 50th anniversary of the Watergate break-in. However, as a Cleveland Browns fan, I prefer to note that it also coincides with the 28th birthday of the team’s recently acquired WR, Amari Cooper.
This Weil survey reviews governance & liquidity arrangements in 2021 sponsor-backed IPOs. The survey reviewed the terms of 15 U.S. IPOs by companies that had one or more private equity sponsors. Of these transactions, 10 were “club” deals involving more than one sponsor, while the remaining five were single-sponsor deals. Here are some of the conclusions on corporate governance arrangements:
– Consistent with previous years, in a significant majority of surveyed deals (87%), Sponsor-backed IPO companies availed themselves of at least some “controlled company” exemptions available under applicable listing requirements, which, among other things, exempt such companies from certain board and committee director independence requirements (other than with respect to the audit committee). Notably, even though companies are availing themselves of the controlled company exemptions, most Sponsor-backed companies are going public with a majority of independent directors.
– Consistent with previous years, Sponsors in the surveyed deals typically (93%) adopted a classified board structure for the newly public company in connection with an IPO. In one of the surveyed deals, the classified board structure established in connection with the IPO is subject to “sunset” (triggered upon the earlier of 5 years following the IPO or when Sponsor’s ownership drops below 50% of the voting power of the common stock necessary to elect directors) to address governance and proxy advisory firm concerns.
– In a significant majority of surveyed deals (80%), Sponsors secured contractual rights to nominate or designate directors to serve on the public company’s board of directors (in some cases, including committees) following an IPO. Such director nomination rights were secured in all “club” deals and in 40% of single-Sponsor deals. In 70% of “club” deals where Sponsors secured contractual rights to nominate or designate directors and in 100% of such single-Sponsor deals, Sponsors secured the right to elect a majority of the directors constituting the board.
The survey says that all of the transactions included provisions secured the ability of shareholders to act by written consent so long as sponsors held a specified ownership percentage. In addition, in 70% of “club” deals and in 20% single-sponsor deals, sponsors had the right to call special meetings of shareholders so long as they held a specified ownership percentage. All of the surveyed deals included a waiver of the corporate opportunity doctrine in favor of the sponsor in their post-IPO charter documents.
The validity and accuracy of the assessments and subsequent company decisions rests heavily on ensuring you have and use high quality ESG data and that there is accountability for progress on the company’s ESG strategy. The data must be credible, validated and reported as appropriate to the board. For more on this, join us today at 2pm Eastern for our PracticalESG.com webcast “Putting the ‘G’ First: Oversight of ‘E’ & ‘S’ in ESG”. Sunrun’s Sundance Banks, Orrick’s JT Ho, Delta Air Lines’ Stephanie Bignon and American Express’s Kristina Fink will share their insights on prioritizing governance and overseeing E&S issues.
You can attend the webcast for free if you are a PracticalESG.com member. Registration information is available on the webcast page – but remember that the incremental cost of a membership gets you much more bang for your buck. If you’re not already a member with access to our full suite of resources, sign up online or by emailing sales@ccrcorp.com or calling 800-737-1271. Our “100 Day Promise” allows you to try a subscription at no risk for 100 days – within that time, you may cancel for any reason and receive a full refund!
On Friday, the SEC announced that it had initiated a settled enforcement proceeding against NVIDIA Corporation arising out of allegedly misleading MD&A disclosure relating to the impact of cryptocurrency mining on its business. Here’s an excerpt from the SEC’s press release:
In two of its Forms 10-Q for its fiscal year 2018, NVIDIA reported material growth in revenue within its gaming business. NVIDIA had information, however, that this increase in gaming sales was driven in significant part by cryptomining. Despite this, NVIDIA did not disclose in its Forms 10-Q, as it was required to do, these significant earnings and cash flow fluctuations related to a volatile business for investors to ascertain the likelihood that past performance was indicative of future performance.
The SEC’s order also finds that NVIDIA’s omissions of material information about the growth of its gaming business were misleading given that NVIDIA did make statements about how other parts of the company’s business were driven by demand for crypto, creating the impression that the company’s gaming business was not significantly affected by cryptomining.
In terms of the specific disclosure obligations that NVIDIA allegedly violated, the SEC’s order cites the provisions of current Item 303(c) of Reg S-K that require companies to call out unusual items impacting their financial results, and to “identify any significant elements of the registrant’s income or loss from continuing operations which do not arise from or are not necessarily representative of the registrant’s ongoing business.” Without admitting or denying the SEC’s allegations, the company consented to an order requiring it to cease & desist from future violations of Section 17(a)(2) and (3) of the Securities Act and the books and records provisions of the Exchange Act. It also agreed to a $5.5 million civil monetary penalty.
The SEC’s press release says that the investigation was conducted by lawyers from its recently revamped Crypto Assets and Cyber Unit. Since that’s the case, the most important takeaway here may well be that isn’t just the folks peddling digital assets who need to be aware that the Division of Enforcement’s “Crypto Cops” are watching, but also more traditional companies with businesses that are being affected by the crypto craze.
Earlier this year, I blogged about the topic of “regulation by enforcement.” At the time, I noted that the SEC denies that it engages in this conduct, but I also pointed out that courts are sometimes sympathetic to defendants’ claims that due process requires them to have adequate notice that they are potentially violating the law. Claims that the SEC is attempting to regulate by enforcement have featured prominently in its high-profile litigation against crypto heavyweight Ripple Labs, with the company asserting that it had not received “fair notice” that its XRP cryptocurrency was a security.
Ripple scored a win in March when the SDNY issued an order denying the SEC’s motion to strike Ripple’s fair notice defense. This excerpt from a Reuters article on the decision summarizes the ruling:
The SEC claimed that the defendants failed to register transactions in its digital asset, XRP, as “investment contracts” under Section 5 of the Securities Act, while the defendants contended it is not sufficiently clear that the phrase “investment contract” applies to transactions in XRP and thus raised a fair notice defense. The fair notice defense arises under the U.S. Constitution’s Due Process Clause and requires that the language of any criminal statute be sufficiently clear to objectively give fair notice of what is prohibited (See F.C.C. v. Fox Television Stations, Inc., 567 U.S. 239, 253 (2012)).
The court denied the SEC’s motion to strike Ripple’s fair notice defense; its opinion represents a significant victory for the defense. This opinion will allow the defense to marshal, on summary judgment, significant and invaluable discovery from the SEC into its own views on how XRP and other digital assets should be classified.
The article also points out that the SEC was successful in its effort to strike the defense in its lawsuit against Kik Interactive. It goes on to say that the ruling is potentially a big deal, because “if future digital asset defendants may successfully bring fair notice defenses under Section 5 based on allegations regarding the SEC’s own conduct, that will open the door in discovery to, at a minimum, requests for the SEC’s notes from meetings with third parties in the digital asset space, draft speeches from SEC leaders on how various digital assets should be categorized, and documents containing the SEC’s formal positions on whether a given digital asset qualifies as a security.”
Mondays are tough enough without having to work your way through a bunch of blogs that are more somber than the PBS NewsHour. Since my first couple of blogs today were pretty serious, I wanted to be sure to close on a lighter note. When I want to do that, the first thing I look for is news on the Wu-Tang Clan that has even the most tangential ties to stuff we cover here. Fortunately, America’s most entrepreneurial hip-hop artists never let me down.
As you know, various Wu-Tang members have jumped into crypto in a big – if not always successful – way, and I’m pleased to tell you that they’re still at it. In one of our more recent check-ins with The Wu-Tang Clan, I discussed Method Man’s nascent NFT venture, which involved him launching his own comics universe. Based on more recent media reports, it looks like he’s launched his venture on the metaverse, or more accurately, the “MEFaverse.” Here’s the project’s website, which provides more details on its “About Us” page:
The MEFaverse is the first metaversal world (Wu York City) where holders get to experience a graphic novel and not simply read it. The story revolves around Method Man, founding member of the greatest Hip Hop group of all time, Wu-Tang Clan, in a world where he became a literal superhero and not just a lyrical one. The project combines all things Hip Hop, skateboarding, and comic books in a format that speaks to all ages. This is where In Real Life (IRL) meets the metaverse.
Sound good? It looks like you need to pony up .08 ETH in order to join in. I’m not sure I understand everything that Method Man’s doing here, but I do think this may be the closest I’ve come to actually understanding a crypto project.
A couple of other Wu-Tang related developments. First, if you’re looking to invest your ever-dwindling 401(k) in Wu-Tang Clan-related NFTs – and let’s face it, at this point could you do any worse than the stock market? – OpenSea has a large collection for your perusal. Second, if you’re looking to buy a home in the Milwaukee area, be sure to check out realtor Jonathan Frost, who reminds us that “Low Mortgage Rates are Temporary, but Wu-Tang is Forever.”
Some significant changes will be on the table when Delaware’s General Assembly considers the 2022 proposed amendments to the DGCL. Among other things, the proposed amendments would permit exculpation for corporate officers, broaden the board’s authority to delegate the issuance of stock and options, and expand appraisal rights. Here’s an excerpt from this Troutman Pepper memo that discusses the proposal to permit officer exculpation:
Perhaps the most impactful change under consideration is an amendment to Section 102(b)(7) of the DGCL, which currently allows corporations to eliminate or limit directors’ personal liability for monetary damages for breach of the fiduciary duty of care. As proposed, the amendment to Section 102(b)(7) would allow corporations to extend similar protections to their officers as well.
An important exception, however, is that officers may not receive exculpation resulting from derivative claims (i.e., those brought by or on behalf of the corporation). Instead, under the proposed amendments, officers can only be exculpated for direct claims (i.e., those brought against them by stockholders alleging direct harm to the stockholders). Additionally, such protection will extend only to certain senior officers: the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, chief accounting officer, or any other person who has, by written agreement with the corporation, consented to be identified as an officer.
Stockholder plaintiffs in corporate litigation often cast a wide net when asserting claims against defendants. It has become increasingly common for senior-level officers to be accused of corporate wrongdoing alongside the board of directors. Often, directors and officers can serve in both capacities. Corporations will now have the option to protect certain officers from stockholder suits largely to the same extent that they can protect their directors.
If enacted, the proposed changes to Section 102(b)(7) are expected to become effective on August 1, 2022. Certain other changes would be effective for transactions entered into on or after that date.
Section 8 of the Clayton Act prohibits competitors from having overlapping directors or managers, regardless of whether any anticompetitive conduct actually occurs. That’s an issue that usually arises in proxy contests or M&A transactions, but in a recent speech, the DOJ’s antitrust chief Jonathan Kanter indicated that the agency will intensify its scrutiny of interlocking director issues outside of the merger review context. Here’s an excerpt from Faegre Drinker’s memo on his comments:
In his opening remarks at the Enforcers Summit, Assistant Attorney General Kanter stated, “[The DOJ] is committed to litigating cases using the whole legislative toolbox that Congress has given us to promote competition. One tool that I think we can use more is Section 8 of the Clayton Act . . . . For too long, our Section 8 enforcement has essentially been limited to our merger review process. We are ramping up efforts to identify violations across the broader economy, and we will not hesitate to bring Section 8 cases to break up interlocking directorates.”
Government challenges to interlocking directorates have been relatively rare, with only three such enforcement actions since 1994. Most recently in June 2021, the DOJ issued a press release stating that the two to executives of a talent and media agency resigned their positions on the board of directors for a competing business after the DOJ expressed concerns that the directors’ positions would make it difficult for the two businesses to continue competing independently.
The memo says that, taken together, Kanter’s comments and the DOJ’s June 2021 press release are a reminder to large companies of the need for an effective antitrust compliance program that considers the potential competitive implications of competitors having overlapping directors or officers. It goes on to say that smaller businesses not meeting Section 8’s jurisdictional thresholds must also remain vigilant for anticompetitive conduct that might result from board interlocks.
According to this Audit Analytics blog, the number of Staff comment letters declined sharply in 2021, but those that were issued generated a lot of back & forth between issuers and the Staff. Audit Analytics calls this back & forth a “conversation” and says that the number of letters per conversation rose to its highest level in the past five years, suggesting that the SEC is scrutinizing responses more closely than in recent years. Not surprisingly, Audit Analytics says this was particularly true with regard to climate change comments – each of those conversations involved more than one comment letter.
The top areas that generated Staff comment have remained relatively constant over the past five years. In 2021, MD&A led the way (31% of comment letters), followed closely by Non-GAAP (27%). 8-K disclosures (10%), segment reporting (9%) and revenue recognition (8%).
This Goodwin blog reminds 12/31 year-end filers that although they had to comply with the SEC’s 2020 MD&A amendments in their Form 10-K, this quarter’s 10-Q will be the first quarterly filing in which compliance with those rule changes will be required. This excerpt highlights some of the more important aspects of the new rules that companies will need to keep in mind:
Two of the newly required MD&A amendments are of particular significance: (1) the alternative interim period comparison and related disclosure requirements and (2) the new critical accounting estimates disclosure requirements. Very briefly, the critical points include the following.
– Interim period comparisons may be presented for sequential preceding periods rather than prior year periods, which was the only option prior to the 2020 financial disclosure amendments. If the company chooses to present a comparison of sequentially preceding periods, the amendments require additional disclosure, as set forth in Item 303(c) of Regulation S-K.
– Critical accounting estimates are now formally required by Item 303(b)(3) of Regulation S-K. An instruction explicitly states that this disclosure should not merely duplicate the accounting policies presented in the financial statement notes, which has been the practice of many companies under the guidance that applied prior to adoption of the amendments.
The blog also reminds filers to keep in mind the rising inflation and interest rate environment as they prepare the MD&A discussion for their first quarter 10-Qs. Goodwin has also put together this handy Form 10-Q Form Check Table that reflects the newly applicable line-item requirements as well as other topical matters that companies should consider addressing in their upcoming filings.
