The September-October 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 (subscribe here to be “in the know”). The issue includes articles on:
– Test Driving Testing the Waters
– Staff Comments on Non-GAAP Financials: The 2021 Edition
Dave & I also have been doing a series of “Deep Dive with Dave” podcasts addressing the topics we’ve covered in recent issues. We’ll be posting one for this issue soon. Be sure to check it out on our “Podcasts” page!
The Delaware Chancery Court’s decision in the Boeing case is the latest in a series of cases suggesting that, as Liz put it in a recent blog, we’re in an era of “easier” Caremark claims. Whatever else that may mean, in this environment, it’s pretty clear that directors need to keep their heads on a swivel when it comes to identifying potential sources of alleged breaches of their duties of oversight. This Directors & Boards article identifies one such area – compliance with COVID-19 mandates. Here’s an excerpt:
On Sept. 9, President Joe Biden announced his six-pronged COVID-19 Action Plan, which will have a significant impact on employers across the country by mandating vaccinations for many employees and requiring regular testing of certain others. Although key details are unknown at the time of this writing, the plan will have a significant impact on many private sector employers, particularly companies that contract with the federal government, those that receive Medicare or Medicaid reimbursement and, most sweepingly, companies with 100 or more employees.
The rule applicable to employers of more than 100 individuals is being developed by OSHA now and, once issued via temporary standard, will require these companies to ensure that their staff is fully vaccinated against or tested weekly for the COVID virus. Employees who are not vaccinated will have to show proof of a negative virus test before reporting to work. The White House estimates this requirement will impact over 80 million workers.
OSHA is seeking to issue its new rule initially pursuant to rarely used emergency authority that it may exercise only where there is evidence of “grave danger from exposure to … agents determined to be toxic or physically harmful or from new hazards.” This basis for the regulation will almost certainly be challenged in court, but in the meantime, it sets forth an unambiguous statement of the importance of a vaccine requirement for employee safety.
Although the COVID-19 Action Plan includes frequent testing as an alternative to vaccination, boards may justifiably be concerned that if the company fails to comply with the regulations, this response could be second-guessed in lawsuits brought alleging that the board’s response reflected inadequate oversight of the “grave danger” to employee (and possibly customer) safety posed by COVID-19. Even if the board requires compliance but relies primarily on testing and not by mandating employee vaccinations, this could possibly still be alleged to be an inadequate response to the risk.
Putting the vaccine mandate aside, the article notes that boards will have a tough time in the current environment arguing that addressing the employee safety risks posed by the pandemic isn’t the kind of essential and mission critical function that triggers a duty to actively oversee the company’s response. That means the company’s overall response to the pandemic, and not just to the COVID-19 Action Plan, needs to be carefully considered and appropriately documented.
Last week, the DOJ announced a new cyber-fraud initiative, and if your company is a government contractor, you’re on the front line. Here’s an excerpt from the DOJ’s announcement:
The Civil Cyber-Fraud Initiative will utilize the False Claims Act to pursue cybersecurity related fraud by government contractors and grant recipients. The False Claims Act is the government’s primary civil tool to redress false claims for federal funds and property involving government programs and operations. The act includes a unique whistleblower provision, which allows private parties to assist the government in identifying and pursing fraudulent conduct and to share in any recovery and protects whistleblowers who bring these violations and failures from retaliation.
The initiative will hold accountable entities or individuals that put U.S. information or systems at risk by knowingly providing deficient cybersecurity products or services, knowingly misrepresenting their cybersecurity practices or protocols, or knowingly violating obligations to monitor and report cybersecurity incidents and breaches.
The DOJ says that it will work closely with other federal agencies, subject matter experts and law enforcement partners throughout the government. This Miller & Chevalier memo on the Initiative notes that it follows on the heels of President Biden’s executive order on cybersecurity, and also discusses a number of recent cybersecurity cases where the government has used the formidable False Claims Act as the basis for its claims.
For me, the one unbending rule of corporate board and committee meetings has always been that the minutes should be the definitive record of the actions taken at them, so I have been dismayed to learn that some companies have opted to record video board meetings held during the pandemic. This Bryan Cave blog discusses the privilege, consent and privacy issues involved in recording board and other corporate meetings. This excerpt reviews the privilege issues that can arise when a company records its board meetings:
Recorded video conferences could be subject to discovery in the litigation context. Board discussions are not inherently privileged, and thus board members who become witnesses may, under some circumstances, be asked about what they discussed at a meeting. But a recording of the meeting is likely to provide a fuller account than participants’ memories or written minutes, and so may yield more powerful evidence. Further, to the extent all or part of a meeting is subject to the attorney-client privilege or other confidentiality provision, the existence of a recording that can be distributed raises the risk of waiver through sharing of the document with parties outside the scope of the privilege.
I don’t care how well-functioning your board is – I guarantee you that a plaintiff’s lawyer would consider an unedited recording of an entire board meeting to be an absolute gold mine. So, if you’re recording these meetings, expect those recordings to be included in a books & records request from a plaintiff’s lawyer on a fishing expedition for derivative claims.
Earlier this week, Activision Blizzard confirmed media reports that it was the subject of an SEC investigation concerning “the company’s disclosures regarding employment matters and related issues.” Regardless of its outcome, the SEC’s decision to pursue such an investigation has proven to be controversial. After all, when was the last time that allegations relating to employment practices caught the eye of the Division of Enforcement?
In defending the investigation, some have observed that the workplace misconduct allegations against the company may call into question the accuracy of the human capital disclosures that appeared in its Form 10-K. But UCLA’s Stephen Bainbridge suggests that the SEC’s investigation represents a revival of the agency’s long-ago abandoned efforts to persuade courts to compel disclosure of uncharged wrongdoing. Here’s an excerpt from his recent blog on the investigation:
Obviously, the SEC will claim that it is about Activision’s allegedly deficient disclosures relating to its Human Resources practices. But even if we accept that risible claim at face value, the SEC is still overstepping its bounds. It’s critical that Activision management has not been convicted of any civil or criminal violations. If they had been, it would be arguable that failing to disclose those convictions would be a material omission (obviously, I realize that one is not convicted of civil violations, but I’m using it as a shorthand).
Where plaintiff complains of noncriminal conduct allegedly constituting mismanagement, courts have been unwilling to require disclosure. In Amalgamated Clothing and Textile Workers Union, AFL―CIO v. J. P. Stevens & Co., 475 F. Supp. 328 (S.D.N.Y.1979), for example, plaintiffs argued that the board of directors had either knowingly violated the labor laws or, at least, failed to prevent management from doing so. According to plaintiffs, this alleged misconduct had harmed the corporation’s reputation and exposed it to liability. The failure to disclose these purported facts in connection with the election of the directors allegedly constituted an omission of material facts. In rejecting plaintiff’s argument, the court held that it would be “silly” to “require management to accuse itself of antisocial or illegal policies.”
Yet, that is precisely what the SEC investigation of Activision assumes management is required to do.
I’m inclined to sympathize with this argument, and I agree that efforts to expand the SEC’s authority beyond financial regulation involve the kind of “mission creep” that threatens its credibility. But I think there’s an important difference between the SEC’s 1970s “qualitative materiality” crusade and situations like this one. Instead of trying to pluck disclosure duties from the ether, this time the SEC has a line-item in its quiver.
Risible or not, that line-item creates a duty to disclose material human capital information, which puts the substance of the disclosure that Activision provided squarely within the SEC’s jurisdiction. The SEC isn’t investigating an omission in search of some amorphous duty to disclose, but whether there were potential misstatements or omissions in response to line-item disclosures that the company was obligated to make.
There’s some irony in the fact that this “principles based” disclosure requirement is being cited as a jumping-off point for a renewed foray by the SEC into the qualitative materiality morass. After all, it was conservatives who championed this “DIY” approach to human capital disclosure, while liberals called for detailed line-item requirements addressing specific metrics. The SEC’s reliance on the new disclosure requirement to investigate conduct that’s pretty far from the core focus of the securities laws suggests that, in the end, the flexibility provided by principles based disclosure requirements may give companies just enough rope to hang themselves.
Cooley’s Cydney Posner recently blogged about an SEC enforcement action targeting a lawyer who allegedly facilitated violations of Section 5 of the Securities Act by rendering legal opinions to transfer agents. Here’s the intro:
Attorneys who may think they can give short shrift to those pesky legal opinions to transfer agents might think twice after reading this complaint, SEC v. Frederick Bauman, filed on September 8, 2021, in the federal district court in Nevada. As described in the SEC’s litigation release, the SEC charged Bauman “with playing a critical role as an attorney who facilitated the unregistered sale of millions of shares of securities by two groups engaged in securities fraud.” According to the SEC’s complaint, between 2016 and August 2019, Bauman issued at least a dozen legal opinions to transfer agents advising that certain shares of four public companies were unrestricted and freely tradeable and that the holders of the shares were not affiliates of the public company issuers. However, the SEC alleged, the shareholders were actually part of groups that controlled those issuers, which made them affiliates under the securities laws.
The SEC alleged that the lawyer lacked a reasonable basis for representing that the shareholders weren’t affiliates, and alleged that their unregistered sales violated Section 5 of the Act, and that in rendering these opinions, the lawyer violated Sections 5(a) and 5(c) of the Securities Act.
The SEC has brought a number of these actions against lawyers over the years, and they’ve also attracted attention from the DOJ. For example, the SDNY indicted two lawyers last year for their role in cranking out allegedly fraudulent Rule 144 opinions for OTC companies.
The September-October issue of the Deal Lawyers newsletter was just posted – & also sent to the printer. Articles include:
– Recasting a Boilerplate Provision: Exclusive Forum Provisions for Private Delaware LLCs After a Decade of Public Corporate Developments
– Buyer Loses an MAE Claim (Again) in Delaware
– Discounted Cash Flow: “I’m Not Dead Yet!”
Remember that, as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers newsletter, we are making all issues of the Deal Lawyers newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the newsletter. That is real value. Here are FAQs about the Deal Lawyers newsletter including how to access the issues online.
Earlier this year, Acting SEC Chair Allison Herren Lee issued a directive to the SEC’s Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings. Yesterday, Corp Fin posted a sample letter identifying some of the comments that companies should expect to receive during the filing review process. Not surprisingly, the sample letter includes comments seeking additional risk factor disclosure concerning climate change-related risks, but it’s also pretty clear that the Staff expects the MD&A section to do a lot of heavy lifting on climate change disclosure.
In fact, the bulk of the sample letter addresses MD&A disclosures. Specific areas where additional MD&A disclosure is sought include:
– the material impact of climate change-related legislation, regulation or international accords, historical and anticipated cap ex for climate-related projects;
– the indirect consequences of climate-related regulation or business trends, such as changes in demand for products and services, increasing competition to develop new lower-emission products, increases in demands for alternative energy & the reputational risks associated with operations or products that produce material greenhouse gas emissions;
– the physical effects of climate change on operations and results, including the impact of severe weather, quantification of weather-related damages and weather-related impacts on the cost of insurance;
– quantification of increased compliance costs and disclosure concerning the purchase and sale of carbon credits and any material effects on the company’s business, results of operations or financial condition.
Another topic addressed in the sample letter was discrepancies between the level of disclosure provided in corporate sustainability reports and in SEC filings. Companies should expect to be asked to what consideration they gave to providing the same type of climate-related disclosure in their SEC filings as they provided in their sustainability reports. Not to blow our own horn, but in our March issue, we told subscribers to The Corporate Counsel to keep an eye on this issue in preparing for Staff scrutiny of their climate change disclosures:
Look Beyond SEC Filings. Many companies have addressed climate change in sustainability reports and other publications beyond their Exchange Act reports. Those communications and third-party publications should be reviewed with an eye toward determining whether what is said in them is appropriately addressed in the company’s SEC filings.
Okay, so maybe the SEC did mention this issue back in its 2010 guidance, but I’m still calling this one a “W” for Dave & me.
While it’s helpful to know what kind of climate comments the Staff says companies should expect to receive, it’s also good to have some insight into what comments the Staff’s provided to date. My colleague Lawrence Heim addressed that topic in this recent PracticalESG.com blog, and it turns out that those comments are pretty consistent with what the Staff is telling companies to expect.
Lawrence cites this Gibson Dunn alert that reviews these comments & provides advice on how to prepare for them, but he also adds the following additional thoughts:
The alert walks through recommendations to prepare for the possibility of a comment on this topic. I would add to those – validate the data and assumptions on which you relied in (a) quantifying your emissions and (b) making future reduction commitments. At a minimum, consider using an internal team of environmental and internal audit staff, augmented with other internal functions as needed. Alternatively, it may be worth considering engaging a qualified external climate emissions quantification and/or risk management expert.
In response to the SCOTUS’s 2018 Cyan decision upholding the ability of plaintiffs to bring Securities Act claims in state court, many companies have adopted federal form bylaws providing that federal courts will be the exclusive forum for bringing claims arising under the Securities Act. Last year, the Delaware Supreme overruled the Chancery Court and held that these federal forum bylaws were permissible under Delaware law. Since that time, federal forum bylaws have served as the basis for several California state courts to dismiss Section 11 claims. Now, this recent blog from Kevin LaCroix reports that a New York court has joined them. Here’s the intro:
In an important development affirming the use of federal forum provisions (FFP) to avoid duplicative parallel state court securities lawsuits, a New York state court judge has granted the securities suit defendants’ motion to dismiss based on the FFP in the corporate defendant’s charter. The ruling appears to be the first in New York – indeed, the first outside of California – to enforce an FFP. The New York court’s enforcement of the FFP is a significant step in companies’ efforts to try to avoid the duplicative litigation problems caused by the U.S. Supreme Court’s March 2018 decision in Cyan.
Kevin points out that the decision is significant because the vast majority of the post-Cyan state court securities class action lawsuits were filed in either California or New York. If federal forum bylaws are enforceable in both of these jurisdictions, Section 11 plaintiffs may find themselves in a bit of a box.
