“Don’t cross the boss” can be decent advice, depending on the type of boss you have. At the SEC, though, who is the boss right now?
On one hand, Gary Gensler is still in charge for one more week – and he had a certain view on the SEC’s priorities and how to accomplish them. On the other hand, while it’s too early to make solid predictions, Paul Atkins has been tapped to lead the Commission and has made a lot of public comments about easing companies’ regulatory burdens, and he could also transform the enforcement environment. At least one former SEC official thinks things could get a little less treacherous for companies, and that he’ll encourage the Enforcement Division to focus more on individual wrongdoers.
The anticipated shift probably adds a wrinkle to in-process enforcement actions. The SEC’s newsroom has announced a number of settlements over the past few weeks, but of course the one the SEC announced last week with Vince McMahon – former WWE CEO and Linda McMahon’s legal spouse – caught my eye. Yes, celebrity gossip is what drew me in, but the nerdy securities law issues are what kept me reading till the very end.
The gist of the SEC’s findings, which Vinny Mac neither admits nor denies, is that he entered into two hush money agreements under which he, individually, paid a total of $10.5 million. However, the Mac Attack also signed the agreements on behalf of the company, which also benefitted from releases of claims. He didn’t inform WWE’s board, legal department, accountants, financial reporting personnel, or auditor, about the agreements. So, nobody considered whether those transactions needed to be accounted for or disclosed by the company. According to the SEC’s order, that was a problem:
McMahon’s failure to disclose the Agreements caused material misstatements in WWE’s 2018 and 2021 annual reports and certain quarterly reports. Because the payments required by the 2019 agreement were not recorded, even though the amounts were paid or to be paid by McMahon, WWE overstated its 2018 net income by approximately 8% for the year and approximately 22% for the fourth quarter of 2018. Similarly, because the payments required by the 2022 agreement were not recorded, WWE overstated its 2021 net income and the net income for the fourth quarter of 2021 by approximately 1.7% and 4.9%, respectively. In addition, these Agreements should have been disclosed as related party transactions. The subsequent payments were also not reflected in the books and records of the Company.
Quoting again from the order, here’s why this caused a restatement:
Although McMahon was obligated to pay all amounts owed, the payments under the Settlement Agreements should have been recognized as expenses by the Company as of December 31, 2018 and as of December 31, 2021. WWE was a party to the Agreements, as evidenced by McMahon signing on behalf of the Company. In addition, WWE benefitted from the Settlement Agreements, receiving releases and avoiding reputational harm caused by allegations of misconduct by its CEO being made public.
As noted above, not only was there a restatement issue, but because the CEO, Chairman and principal stockholder agreed to make the payments on behalf of the Company, the SEC said that in addition to recording the expense, WWE was also required to disclose the transactions and the subsequent payments when made as related party transactions under GAAP.
But wait, there’s more! After the agreements came to light and the board investigated and identified the restatement triggers, it clawed back incentive compensation payments that McMahon received during the 12-month periods following filings containing the financial statement periods that the company was required to restate. That takes care of one aspect of the required Sarbanes-Oxley clawback (in this case, the smaller part dollar-wise). What the company did not do was claw back profits received from stock sales during the applicable period. The SEC is not one to let any prong of a SOX 304 clawback slip by, so it brought a claim for that too.
Like I said, this order has something for everyone. The SEC brought claims under various provisions. The press release summarizes:
McMahon consented to the entry of the SEC’s order finding that he violated the Securities Exchange Act by knowingly circumventing WWE’s internal accounting controls and that he directly or indirectly made or caused to be made false or misleading statements to WWE’s auditor. The order also finds that McMahon caused WWE’s violations of the reporting and books and records provisions of the Exchange Act. Without admitting or denying the SEC’s findings, McMahon agreed to cease-and-desist from violating those provisions, pay a $400,000 civil penalty, and reimburse WWE $1,330,915.90 pursuant to Section 304(a) of the Sarbanes-Oxley Act.
That penalty seemed relatively light to me, but maybe it’s reasonable under the circumstances. Not only are enforcement priorities an open question, but I can certainly see how a person who’s not well-versed in accounting literature would assume that payments they made individually wouldn’t affect the company’s financials or disclosures. Actually, though, a similar scenario is described right in a Staff Accounting Q&A. I guess that’s why you’d want to run your agreements by the accountants and lawyers.
– Liz Dunshee
As reported by Reuters, a committee in Arizona today is considering an application that could have big ramifications for lawyers. From Bloomberg:
Big Four accounting firms have intermittently been seen as a potential threat to Big Law firms, even though they’ve never competed for complex legal work in the US. Many industry observers have said that could possibly change if the Big Four were able to overcome the barrier to practicing law in the US, the world’s largest and most important legal market.
A committee that makes recommendations to Arizona’s top court is slated on Jan. 14 to review an ABS application filed by KPMG Law US. Arizona, unlike most other states, allows approved entities to provide legal services even if some of their owners are not lawyers.
KPMG and other accounting firms have provided legal-adjacent services to companies in the US, but have been restricted from practicing law or providing legal advice. Most US states’ professional ethics rules limit the practice of law, which has a broad definition, and law firm ownership, to licensed lawyers.
KPMG says that if approved, its work would “complement” the services of traditional law firms. Its focus would be on large-scale, process-driven work, such as volume contracting, remediation exercises, M&A-driven harmonization of contracts, and other legal managed services. Stay tuned!
– Liz Dunshee
Big 4 firms have been making a play for legal services for more than two decades. This Artificial Lawyer blog says that in countries where they’ve entered the market, they haven’t “rocked the world.” Richard predicts we’d likely see the same (minimal) impact here.
What do you think? Please participate in our anonymous poll to share your view on what would happen if KPMG gets the license it’s seeking:
– Liz Dunshee
It’s been gut-wrenching to watch the wildfire destruction that has occurred in California over the past several days. Our hearts go out to the nearly 8 million residents of L.A. and Ventura Counties who are facing dangerous conditions, and everyone else affected by the disaster. I think that even if they haven’t lived in California, many people across the country have some connection to the Los Angeles region. We have all been watching with sadness – as well as hope that people will come together to rebuild.
As of this morning, the SEC has not made a broadly applicable announcement about filing relief, but I expect they would encourage companies and other regulated entities to contact the Staff with questions and concerns and tell investors to watch out for scams, similar to their response to Hurricane Helene. We will continue to monitor developments.
– Liz Dunshee
John drew the short draw of blogging over the holidays, and the CTA drama gave him a few things to write about. The saga isn’t over, but we now have more clarity. Here’s an update, courtesy of this McGuireWoods blog:
You may recall that on December 26, 2024, the Fifth Circuit vacated the “part of the motions-panel order granting the Government’s motion to stay the district court’s preliminary injunction enjoining enforcement of the CTA,” as well as the Reporting Rule. In other words, FinCEN cannot enforce the CTA and there is no reporting obligation until this gets resolved.
The Fifth Circuit has issued an expedited briefing. Briefing will occur in February, and the court has scheduled oral argument on March 25, 2025, after which it will need time to issue an opinion. As with the temporary lifting of the injunction precluding enforcement, FinCEN would likely provide additional time to file should the law go back into effect. In light of this schedule, Reporting Companies now have some clarity on the time – likely Q2 2025 – they have to analyze their compliance obligations.
– Liz Dunshee
In this 27-minute episode of the “Women Governance Trailblazers” podcast, Courtney Kamlet and I interviewed Karla Munden, who is SVP and Chief Audit Executive with Lincoln Financial Group, and an Independent Director at American Express National Bank. Karla also recently spent time in South Africa as part of the immersive B-Direct program, where she learned how to adapt her U.S.-based corporate governance skills to a different culture. We discussed:
1. Karla’s leadership experiences and learnings over the years.
2. U.S. versus South African approaches to corporate governance and stakeholder priorities, and the importance of cultural dexterity.
3. Leadership lessons from Karla’s Navy service that have translated into her corporate roles.
4. Karla’s experiences on the boards of American Express National Bank and the William and Mary Foundation, including similarities in not-for-profit and for-profit boards, and the top qualities of effective board members.
5. Karla’s role as a minority owner of the Caroline Cobras, a football team in the National Arena League.
6. What Karla thinks women in the corporate governance field can add to the current conversation on the societal role of companies.
To listen to any of our prior episodes of Women Governance Trailblazers, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
– Liz Dunshee
Here’s something that Meredith blogged a couple days ago on CompensationStandards.com: You probably saw this week’s Wall Street Journal article on the Delaware Chancery’s latest decision related to Elon Musk’s 2018 Tesla pay package. There are very few takeaways for executive compensation professionals in the decision, but it seems worthy of addressing here — even if only for its novelty. So, keeping with the theme of my April post on Tesla’s proxy filing — including the proposal requesting that stockholders ratify said pay package after the Chancery Court ordered it rescinded — here are five things to know about the latest decision:
– This opinion was still at the Chancery Court level — penned by Chancellor McCormick, who was also responsible for the initial post-trial decision ordering rescission of the award. The order addressed the defendants’ motion to “revise” the post-trial opinion based on the stockholder vote and plaintiff attorneys’ petition for fees and expenses.
– Chancellor McCormick used this opportunity to clarify/emphasize a few points from the initial post-trial opinion. Specifically, that the decision did not hold that the Tesla board should have paid Musk nothing. She says, “there were undoubtedly a range of healthy amounts that the Board could have decided to pay Musk. Instead, the Board capitulated to Musk’s terms and then failed to prove that those terms were entirely fair.” She also clarified that none of the legal theories applied in the opinion were novel — if anything was novel in the opinion, it was simply that those legal principles had not previously been applied by the court to Musk vis-a-vis Tesla.
– The opinion considered events post-dating the initial post-trial decision, including the actions of the single-member special committee that was formed to assess the redomestication of Tesla to Texas and whether Musk’s 2018 award should be submitted to a second stockholder vote and the 2024 stockholder vote intended to “ratify” the award.
– Chancellor McCormick found that the “ratification” argument had four fatal defects — three expected, one surprising.
- First, there are no procedural grounds for flipping the outcome of a post-trial decision based on evidence created after trial. Procedural rules allow the court to reopen the trial record for newly discovered evidence (“in existence at the time of trial”) but not newly created evidence. From a policy perspective, if this was allowed, “lawsuits would become interminable” and it would “eviscerate the deterrent effect of derivative suits.”
- Second, as an affirmative defense, common-law ratification is waived if not timely raised. And, “wherever the outer boundary of non-prejudicial delay lies,” raising the defense “six years after this action was filed, one and a half years after trial, and five months after the Post-Trial Opinion” was too late.
- Third, in a conflicted-controller transaction, the “maximum effect” of stockholder ratification is to shift the burden of proving entire fairness; it doesn’t shift the standard of review, which would require MFW’s additional protection of an independent committee and conditioning the transaction on the dual protections before negotiations. Defendants tried to argue that MFW was invoked after the post-trial opinion, to which the opinion says, “One does not ‘MFW‘ a vote, which is part of the MFW protections; one ‘MFW‘s a transaction.”
- Finally, the proxy statement contained material misstatements. Tesla went to great lengths to avoid any argument that this second vote was not fully informed — having annexed 10 documents to the proxy, including the opinion and the special committee’s report to the board. But the legal impact of the stockholder ratification was unclear — and, trying to be transparent, the proxy said as much. That was a problem. “To be fully informed for ratification purposes, ‘the stockholders must be told specifically . . . what the binding effect of a favorable vote will be.’” Plus, the proxy used phrases like “extinguish claims,” “any wrongs … should be cured” and the disclosure deficiencies “corrected,” which were “materially false and misleading.”
– Using “sound” methodology, the plaintiff’s attorneys asked for $5.6 billion in freely tradeable Tesla shares as attorney fees. To this, the opinion says, “in a case about excessive compensation, that was a bold ask.” To avoid a windfall and reach a reasonable number, the opinion adopts the defendants’ approach of using the $2.3 billion grant date fair value to value the benefit achieved and applies 15% to that amount, resulting in a (still massive) fee award of $345 million.
– Liz Dunshee
As Dave noted last week, one thing that many of us are grateful for this holiday season is that we can take a big – and possibly permanent – pause from working to comply with the SEC’s climate disclosure rule that was adopted last spring. However, as Dave also pointed out, CSRD compliance will still require effort from many companies. On that front, Ropes & Gray recently updated its “transposition tracker” – which shows which EU member states have implemented CSRD requirements in their national laws.
A recent Teneo memo predicts that CSRD may even affect companies that aren’t subject to that disclosure regime, if institutional investors push for comparable disclosure across their portfolios. This consequence is included in the memo as one of the 10 most likely scenarios that could impact corporate environmental & social initiatives as the balance of power shifts in Washington. Here are 4 more possibilities that Teneo shares for 2025 & beyond:
– Greater scrutiny of company DEI programs. While the 2023 Supreme Court’s Students for Fair Admissions rulings focused on higher education, conservative campaigns to end corporate DEI programs have landed on company doorsteps this year. As a result, many companies have conducted legal reviews of their DEI programs and communications. New challenges to DEI initiatives are expected under the next administration, including the reinstatement of an executive order against “divisive topics” in DEI training for contractors and possible action from the Department of Labor to change federal policies. In addition to the risk of another shift in the legal landscape, the Trump administration is expected to appoint vocal critics of DEI, such as Elon Musk, Vivek Ramaswamy and Stephen Miller, to federal positions. Companies should prepare for the campaign against DEI to become more public and challenging as advocates, including employee groups, nonprofits and investors, press companies to stand firm with prior commitments.
– Revisited attacks on proxy advisory firms and ESG shareholder proposals. The SEC may resume its prior initiatives to rein in the perceived power of proxy advisory firms like ISS and Glass Lewis. Rules requiring proxy advisors to eliminate corporate advisory services and/or allow companies to review their reports ahead of official publication may also be revisited. ESG raters could also be affected by these initiatives. Other regulation that could limit the number of ESG shareholder proposals will likely be considered, such as higher minimum share ownership requirements for proponents and expanded grounds for companies to exclude ESG proposals. If shareholder powers become more limited, companies should expect proponents to adjust tactics, such as launching more “vote-no” campaigns against directors and/or Say on Pay votes, as well as single-issue proxy contests.
– Increasing importance of shareholder engagement. Investors will be eager to understand how these fundamental shifts will impact ESG and DEI programs within their portfolio companies. U.S. investors may have a very different perspective than European investors. With off-season shareholder engagement underway, companies should not deviate from the values expressed in their sustainability reports, as these statements are on-record, signed by the CEO and leadership of the company. As the new administration’s policies play out, companies can respond to changes by communicating them in proxies, ESG reports, websites, earnings calls and social channels.
– Fewer ESG mentions on earnings calls. Over the past year, companies have increasingly reevaluated their ESG communications strategies, especially during earnings calls. Under a Trump administration, there is expected to be less emphasis on sustainability and DEI-related policies. As regulatory pressures around ESG issues arise, companies may prioritize other financial and operational topics. The polarization of ESG may lead many companies to avoid further public discussion on contentious topics to steer clear of potential backlash. Going forward, earnings calls are expected to feature less ESG-related content, as they primarily focus on short-term performance and have limited time to address issues beyond financial metrics.
This memo is part of a series that Teneo has been running, which you may want to check out if you’re involved with your corporate sustainability disclosures:
– State of Sustainability: 10 takeaways & key stats from 2024 sustainability reports
– DEI Will Survive: how corporate DEI-related programs & disclosures have evolved in the wake of recent backlash
– What Chief Sustainability Officers Are Thinking: moving towards pragmatic goals & balancing interests
Remember to visit PracticalESG.com for a deeper dive into how to implement initiatives and disclose ESG performance. We’re also continuing to post relevant resources in our “Sustainability” Practice Area on this site.
– Liz Dunshee
For years, we’ve maintained a blog roll on the left side of this page – which you can use as a resource to check out corporate governance & securities updates from practitioners and others in our community. Given the number of informative podcasts that folks have launched over the past few years, we’ve now added a similar list on our “podcasts” page!
One of the newer series that I’ve been enjoying is the “Shareholder Primacy” podcast with activist investor & advisor Michael Levin and Tulane Law Prof Ann Lipton. Of course, you can also access the archives of our podcasts on that page… dating all the way back to 2003! (Broc was an OG on the podcasting front!) And don’t miss Meredith’s “Pay & Proxy Podcast” over on CompensationStandards.com.
– Liz Dunshee
Yesterday, the President-elect announced more picks for leadership roles in the incoming administration, including the one we’ve all been waiting for: SEC Chair.
The nominee – Paul Atkins – is already familiar to many practitioners. He served as an SEC Commissioner from 2002 – 2008 (and during that time, current SEC Commissioners Hester Peirce and Mark Uyeda served as his Counsel). He held several other roles at the agency prior to that, including as Chief of Staff to then-Chair Richard Breeden and later as Counsel to SEC Chair Arthur Levitt. Since then, Mr. Atkins founded and has been running a prominent consulting firm, Patomak Global Partners, among other activities.
The confirmation process should give us more insight into the priorities of an Atkins SEC. For now, it’s a safe bet that at least some of those priorities will differ from what we’ve experienced during Chair Gensler’s tenure. In fact, the WSJ Editorial Board nicknamed him the “Anti-Gensler” in an op-ed yesterday, with lots of optimism that he’ll curb enforcement efforts, improve our capital markets, and work to lower costs for public companies & investors.
In this roundup of Atkins’ past commentary, Cooley’s Cydney Posner points out that he has also criticized the shareholder proposal process, saying the SEC had “eviscerated the exclusions,” as well as the notion of “decision-useful” (vs. “material”) information for investors, the trend of expanding risk factors, and many other requirements that have created compliance challenges for companies. This Politico article offers a few more predictions (also see reporting from the WSJ and Bloomberg):
As chair, Atkins would likely weigh unwinding parts of Gensler’s agenda and crafting bespoke rules for the crypto market — something Trump himself vowed to do on the campaign trail. While speaking at a Federalist Society event in April, Atkins called the lack of regulatory clarity around crypto a “fundamental underlying issue” that the SEC needs to address.
He also said that a change in administration would likely also mean a move to undo some of the rules enacted under Gensler. But Atkins added that he hoped the SEC would “get beyond that,” too.
We don’t know exactly when the agency’s new chair will be confirmed. This nomination is at least a month ahead of schedule compared to the last couple of go-rounds, when nominations were announced in January, but whether that will affect the Senate’s timeline is still an open question. Back in 2020 when Chair Gensler was nominated, the process went like this: nomination announced in late January, Senate Banking Committee met to approve the nomination in early March and full Senate confirmation came along in mid-April. As previously announced, Chair Gensler is leaving the SEC on January 20th.
– Liz Dunshee
