Author Archives: Liz Dunshee

On Friday, the SEC announced a $35 million settlement with Activision Blizzard for findings that it failed to maintain disclosure controls related to complaints of workplace misconduct – and separately, that it violated the whistleblower protection rule. The SEC’s 7-page order rests on two main allegations by the SEC. The press release summarizes:

According to the SEC’s order, between 2018 and 2021, Activision Blizzard was aware that its ability to attract, retain, and motivate employees was a particularly important risk in its business, but it lacked controls and procedures among its separate business units to collect and analyze employee complaints of workplace misconduct. As a result, the company’s management lacked sufficient information to understand the volume and substance of employee complaints about workplace misconduct and did not assess whether any material issues existed that would have required public disclosure.

Separately, the SEC’s order finds that, between 2016 and 2021, Activision Blizzard executed separation agreements in the ordinary course of its business that violated a Commission whistleblower protection rule by requiring former employees to provide notice to the company if they received a request for information from the Commission’s staff.

For the disclosure controls aspect of this settlement, the SEC focused on the company’s risk factors and cautionary language in Forms 10-K & 10-Q. The SEC didn’t allege that any particular statement was materially inaccurate or misleading – the problem in the SEC’s view was that shortcomings in how workplace-related information was collected and communicated to the company’s disclosure committee prevented the disclosure decision-makers from evaluating whether disclosure on this topic was needed. SEC Commissioner Hester Peirce dissented from both aspects of the order. Here’s her objection to the alleged “disclosure controls” violation:

In other words, the required disclosure controls and procedures must capture not only information that a company is required to disclose, but also an additional, vaguely defined category—information “relevant” to a company’s determination about whether a risk or other issue reaches the threshold where it is “required to be disclosed.”

She continues:

The requirement cannot be that a company’s disclosure controls and procedures must capture potentially relevant, but ultimately—for purposes of disclosure—unimportant information. As I read it, in this Order, the SEC once again has sat down at the gaming console to play its new favorite game “Corporate Manager.” Using disclosure controls and procedures as its tool, it seeks to nudge companies to manage themselves according to the metrics the SEC finds interesting at the moment. For Activision Blizzard, today, that metric is workplace misconduct statistics, but other issues will follow. In this level of the enforcement game, the SEC has added $35,000,000 to its point total despite the Order not identifying any investor harm.

The settlement comes at a time when the SEC has signaled that it may propose more prescriptive human capital disclosure rules in response to investors wanting more comparable info on that topic. Those rules are not yet in place, but the Enforcement Division already appears to be interested in the principles-based aspects of that topic.

Regardless of whether you find yourself nodding along with Commissioner Peirce, this settlement is another reminder that “workplace misconduct” continues to be a topic that requires board attention, appropriate oversight & information collection, and careful disclosures. The whistleblower component of the action also suggests you should take a fresh look at your separation terms. As this Cooley blog notes, this stuff is no longer just “employment lawyer” territory – you should have a cross-functional team.

Recall that last month, the SEC brought an enforcement action against McDonald’s to allege that the company mischaracterized the nature of the former CEO’s separation from service by not acknowledging that purported workplace misconduct was “cause.” (Commissioners Peirce & Uyeda dissented and said they believed the SEC was rewriting Item 402 disclosure requirements through an enforcement proceeding.) Two weeks later, the Delaware Court of Chancery allowed a fiduciary duty claim to proceed against McDonald’s HR head, finding at the motion to dismiss stage that if all the facts alleged by the plaintiff were true, the officer consciously ignored red flags and didn’t put in place reasonable information systems to report to the CEO & board. And while Activision settled an EEOC claim last year for a lower amount than this SEC matter, that company continues to face litigation in state court.

– Liz Dunshee

For those getting ready to file their annual report, the SEC has posted the latest version of Form 10-K on its “Forms” page – you can also find a link to the pdf in our “Form 10-K” Practice Area, as well as a downloadable cover page in Word for ease of use.

Many practitioners are taking the inclusion of the Dodd-Frank clawback checkboxes on the Form as confirmation that they are required on filings to be made this spring, and interpreting the SEC’s late-January CDI as guidance that you simply don’t need to mark the boxes. As I blogged on CompensationStandards.com, concerns linger – specifically, that including the checkboxes without marking them is a disclosure in and of itself and could be misleading. We heard informally last week that Corp Fin may issue additional guidance on this point, if it continues to cause consternation. But when it comes to “The Great Checkbox Debate of 2023,” one thing is pretty clear: you’re unlikely to face consequences from the SEC for any sort of perceived foot-fault this year.

– Liz Dunshee

Whenever the SEC issues a Form, it includes an “estimated average burden hours per response.” That’s because the Paperwork Reduction Act requires federal agencies – including the SEC – to estimate the compliance burden for any reporting or recordkeeping requirements. There’s always a section about this at the back of SEC proposals and adopting releases, although practitioners rarely comment on it. For the latest Form 10-K, the estimated burden is 2,255 hours!

Last week at the Northwestern Pritzker School of Law’s Securities Regulation Institute, there was a question about whether you could use this figure as a basis for estimating outside counsel fees. Scott Liamis of Salesforce explained why the answer is no:

1. The hours figure is intended to capture both internal & external hours, and isn’t limited to legal compliance (i.e., it also includes the compliance efforts of finance, treasury, auditors, etc.).

2. Although the Paperwork Reduction Act is a very important procedural requirement for SEC rulemaking, it’s difficult for companies to parse out the effort that goes into preparing a specific form – because it is just one component of a year-round integrated governance and disclosure process.

– Liz Dunshee

Dave blogged last week that you’ll need to make sure your insider trading policy is ready for “prime time” in light of the increased transparency that will result from the SEC’s recently adopted rules on on Rule 10b5-1 and insider trading (here are memos that lay out the requirements).

There’s been some confusion around when exactly a copy of these policies will need to be filed as an exhibit. With all of the other triage happening on securities compliance right now, people have been asking, “how urgent is this?”

At the Northwestern Pritzker School of Law’s Securities Regulation Institute last week, Corp Fin Director Erik Gerding said the Staff may issue additional guidance about the effective dates for disclosures under the new rules. He clarified that for annual disclosures, the phrase “the first filing that covers the first full fiscal period” would mean the first annual report that covers the 2024 year – which calendar-year companies will file in spring 2025. So, as John summarized in a recent post in our “Q&A Forum” (#11,400):

– Companies with a calendar year end will be required to disclose the information required by Item 408(a) of Regulation S-K beginning with their second quarter 2023 Form 10-Q filing (i.e., the 10-Q for the period ending June 30, 2023).

– Companies with a calendar year end will be required to provide the disclosures called for by Item 408(b) and 402(x) of Regulation S-K and Item 16J of Form 20-F in the Form 10-K filing for their 2024 fiscal year (i.e., the 10-K covering the year ended December 31, 2024, which will be filed in 2025). Copies of their insider trading policies will also need to filed as exhibits to that filing.

If this helps you breathe a sigh of relief, great – but don’t get too comfortable. Some folks still want to see a CDI from Corp Fin before planning for a 2025 exhibit. And even if we do have a two-year runway, the insider trading policy is a sensitive document – so it will take time to socialize and approve amendments. That means you need to dust it all off sooner rather than later. Don’t wait till the eleventh hour!

In his blog last week, Dave suggested several issues to consider. We’ll be providing even more guidance in the forthcoming issue of The Corporate Counsel newsletter. Email sales@ccrcorp.com if you want immediate access to that resource and aren’t already subscribed.

– Liz Dunshee

A WSJ article from late last week reported that the SEC is considering less onerous climate-related financial reporting after significant pushback to its proposal from companies – as well as investors. Here’s an excerpt:

The final version of the SEC rules, expected this year, will likely still mandate some climate disclosures in financial statements, according to the people close to the agency. But the commission is weighing making the requirements less onerous than originally proposed, the people said, such as by raising the threshold at which companies must report climate costs.

The article continues:

After the backlash to the climate proposals, officials are considering changes such as a higher trigger for disclosure, using different percentages depending on the financial item in question or eliminating a bright-line test altogether, the people close to the agency said.

Some of the groups pushing for the new climate-disclosure rules said they are open to changes.

The SEC doesn’t appear to be signaling that it’s giving up on the climate disclosure rule altogether – although that might be the preference of two of the Commissioners, based on public speeches like this one. At this point, the Staff is continuing to wade through thousands of comments on its way towards a final rule. They’re aiming for that rule to be more workable for companies – and survive anticipated legal challenges.

– Liz Dunshee

Tune in tomorrow for the webcast – “Activist Profiles & Playbooks” – to hear Joele Frank’s Anne Chapman, Okapi Partners’ Alexandra Higgins, Spotlight Advisors’ Damien Park and H/Advisors Abernathy’s Dan Scorpio discuss lessons from 2022’s activist campaigns & expectations for what the dawn of the universal proxy era may have in store!

We are making this DealLawyers.com webcast available on TheCorporateCounsel.net as a bonus to members – it will air on both sites.

Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.

Continuing Legal Education: We will apply for CLE credit in all applicable states (with the exception of SC and NE who require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.

– Liz Dunshee

I blogged last fall about a reason to be cautious when amending advance notice bylaws in response to the SEC’s newly effective universal proxy card rules: hedge fund activists aren’t going to take these amendments lying down. Now, as we continue to await the views of proxy advisors and institutions on this topic, well-known shareholder proponent Jim McRitchie is proactively encouraging “guardrails.” Jim recently announced that he has filed shareholder proposals with 29 companies on the topic of “fair elections.”

The proposals request that the companies adopt a bylaw amendment that would require shareholder approval for advance notice bylaws that go beyond the “norms” that existed before the SEC’s new universal proxy card rules went into effect. Specifically, for advance notice bylaw amendments that:

1. Require the nomination of candidates more than 90 days before the annual meeting,

2. Impose new disclosure requirements for director nominees, including disclosures related to past and future plans, or

3. Require nominating shareholders to disclose limited partners or business associates, except to the extent such investors own more than 5% of the Company’s shares.

When it comes to the case that I mentioned at the outset of this blog, the Delaware Chancery Court ruled against the company in late December. If you’re going down the “amendment” path, John recently shared a few tips on DealLawyers.com. This Proxy Season Blog from last week gives even more guidance on meeting conduct in the event of a contested election.

– Liz Dunshee

This blog from Gunster’s Bob Lamm zeroes in on a trend plaguing many companies these days: too many chiefs. As Bob points out, when too many people are responsible, nobody is accountable. Here’s an excerpt that explains why an expanding C-suite needs to be handled with care:

From a broader governance perspective, one would like to think that before a company creates some of the more unusual and/or duplicative chiefdoms above, the board or the comparable authority would have a clear understanding of where each chief’s responsibilities begin and end, and how the responsibilities of each relate to other chiefs’ areas.  However, my experience suggests that may not be the case, which means that accountability is difficult to determine both internally and externally.  Perhaps this isn’t a problem when things are going well, but when they’re not?

There are many other areas of concern to a nerd like me.  For example, which chiefs are deemed to be “executive officers” under SEC rules?  Are they also deemed Section 16 officers?  What’s the rationale for each?  (As an aside, it’s hard enough to explain to clients why someone who is an “executive officer”  may not be a “Section 16 officer,” or vice versa.  This plethora of chiefdoms doesn’t help.)  There seem to me to be compensation issues as well – are all chiefs created equal?  The answer must be “no,” because the traditional chiefs – the CEO, CFO, etc. – do not have identical compensation.  But how do you weigh compensation levels when presumably each chief oversees a significant area?

– Liz Dunshee

In this “D&O Diary” blog, Kevin LaCroix analyzes two recent dismissals that show that SPAC-related securities class actions aren’t always cut & dry. In a January 10th ruling involving DraftKings, the court found that a complaint based on a short seller report wasn’t adequate to move past the pleadings stage. And in a January 11th ruling involving Lucid Motors, the court dismissed a case based on statements made prior to the announcement of merger discussions. Here’s Kevin’s analysis:

Judge Engelmayer’s skepticism of the plaintiff’s allegations here based on nothing more than the short seller report suggests that the plaintiffs in these other cases could face an uphill battle in trying to establish that their complaints meet the fundamental pleading requirements To be sure, Judge Engelmayer did not say that complaints based on short seller reports could never meet the requirements – but the standards are high, and Judge Engelmayer’s analysis suggests that many of the short-seller based complaints may not make it past the pleading stage.

The court’s ruling in the Lucid case is interesting because the underlying allegations related to statements made by the CEO of the merger target company, before the merger was completed . Many of the SPAC-related securities suits have involved allegations based on alleged pre-merger statements. However, what arguably makes the Lucid case distinct is that the supposedly misleading statements were made not only pre-merger, but before the later merger had even been announced. Moreover, the widespread public conjecture about a possible merger was “speculative” (and for that matter could not even be attributed to the defendants). While the court’s ruling underscores the challenge of basing securities claims on statements made before a merger is announced, the ruling arguably has less relevance to claims based on alleged statements after the merger announcement.

One final observation is that with the dismissals granted in these and other SPAC-related securities suits, the alternative vehicle of Delaware state court direct action breach of fiduciary duty cases (like, for example, the Gig3 case in which the Delaware Court of Chancery recently denied the motion to dismiss, as discussed here), may look to the plaintiffs’ lawyers like a more attractive option that the pursuit of securities class action lawsuits.

– Liz Dunshee

As John blogged a few weeks ago, the clock is now running on the SEC’s recent Rule 10b5-1 amendments – and we’ll be covering what you need to do right now in a webcast coming up next Tuesday, January 24th at 2pm ET. To get a jump on thinking about all of that, I’m happy to share this guest blog from Orrick’s JT Ho, Carolyn Frantz, and Bobby Bee:

The adopting release for the SEC’s recent Rule 10b5-1 amendments has now been published in the Federal Register and 10b5-1 plans that are adopted by non-issuers on or after February 27, 2023 must comply with the new rules. While a lot of attention has been paid to the new requirement that, for directors and officers, the first trade under a plan can occur no sooner than 90 days after the plan is entered into, there are other considerations that can significantly impact planning.

First, in some circumstances, the cooling-off period can be longer than 90 days – the rule provides that the first trade under a new plan occur after the later of 90 days or two days after filing the 10-Q or 10-K for the fiscal quarter in which the plan was adopted. In some circumstances, this could significantly lengthen the applicable period before the first trade can occur, particularly for plans entered into near the end of the fiscal year, given the amount of time between the end of the fourth quarter and the filing of the 10-K. In addition, many issuers restrict the adoption, or amendment, of 10b5-1 plans during a blackout period around earnings for a group, which typically includes directors and officers. The combination of the impact of the cooling-off period and the blackout period restrictions, however, limit flexibility for planning initial trades using 10b5-1 plans.

For example, consider a Large Accelerated Filer with a fiscal year end of December 31 and blackout periods starting on the last day of the second month of each fiscal quarter and running through a period two days past the earnings announcement. Directors and officers wishing to enter plans would only have the following options for entering into plans and commencing trades in 2023:

The date of first trade could be even later than this, however, if an existing 10b5-1 plan is terminated during a newly adopted 10b5-1 plan cooling-off period – which is possible under the new rule, given that overlapping plans are allowed so long as the time in which trades are being made does not overlap. In such a case, the cooling-off period for the newly adopted 10b5-1 plan would restart at the termination of the prior plan.

It is wise to ensure that your directors and officers understand the impact of these restrictions on their planning, and in particular, understand any trades they want to execute under a new 10b5-1 plan before year end must be planned in the summer.

– Liz Dunshee