If you’ve ever worked on a public offering, you know that as part of those transactions issuer’s and underwriters’ counsel routinely provide a statement in their closing opinions to the effect that nothing has come to their attention that would lead them to believe that the prospectus contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. This statement is sometimes referred to colloquially as a “10-5 letter” or even a “10b-5 opinion”, but a recent New York trial court decision provides a reminder that a 10b-5 letter isn’t a legal opinion, and that some pretty significant consequences result from that conclusion.
In Camelot Event Driven Fund v. Morgan Stanley, (NY Cty.; 9/24), the plaintiff sought discovery of materials provided by the underwriters to their counsel in connection with that counsel’s 10b-5 opinion. In rejecting the defendants’ efforts to avoid producing those documents, the Court observed:
Because the 10b-5 letter is not legal advice or a legal opinion, the documents delivered to [underwriters’ counsel] (and both the written and oral communications with [such counsel]) for the purpose of obtaining the 10b-5 letter were not delivered to or had with [underwriters’ counsel] for the purpose of obtaining or facilitating legal advice. They are thus not privileged and must be produced. Stated differently, the facts and communications that the defendants chose to have [underwriters’ counsel] review and rely on (or not rely) on for the purposes of the 10b-5 letter are validly within the purview of discovery and are not privileged because they are given for the purposes of a business document needed for the transaction and not for the purpose of obtaining a legal opinion or legal advice.
The Court went on to say that non-privileged facts that were communicated from the underwriters to underwriters’ counsel in connection with the preparation of the 10b-5 letter did not become privileged on that basis, and the plaintiff was entitled to “fulsome discovery” concerning information that was disclosed to or withheld from counsel for that purpose. However, the Court said that the plaintiff was not entitled to ask underwriters’ counsel to disclose why the underwrites chose to disclose or not disclose certain facts for purposes of the 10b-5 letter, because that information was privileged.
Last week, Liz blogged about a recent NACD report on technology governance. I thought that an article in the most recent issue of The Boardroom Insider discussing the top AI trends that boards should keep in mind as they perform their oversight responsibilities might be a nice follow-up to that blog. The article follows up a roundtable discussion on this topic that included IBM CTO Khwaja Shaik and Gartner CFO Jackie Lyons. This excerpt highlights the need for boards to change the way they look at risk management of AI issues:
The board should refresh its views on risk management for AI projects. “Set up the governance of AI as a business risk rather than just an IT risk,” says Lyons. This will push management and the board to shape an overall AI integration and risk policy, rather than random AI trials throughout the company, where, as Shaik says “the left hand doesn’t know what the right hand is doing.” Still, a good risk oversight policy should allow for plenty of AI innovation throughout the system. Bottom-up experiments and projects offer a far more productive ecosystem than top-down policies. Shaik says even large, established companies will need to take a more fatalistic, venture capital approach with AI projects. “Nine out of ten will fail, but the one that wins pays for all the rest.”
Other trends identified in the article include the need to appropriately identify the impact of AI energy consumption on a company’s stated ESG and carbon footprint goals and directors’ personal vulnerability to AI-enhanced spoofing or similar scams.
We’re kicking things off today in San Francisco with our “Proxy Disclosure Conference” and we’ll follow that up tomorrow with our “21st Annual Executive Compensation Conference.” The agendas for our conferences include 15 substantive panels over 2 days – as well as an interview with Erik Gerding, the Director of the SEC’s Division of Corporation Finance. Here’s what’s on tap for today.
We’re very excited to be back in-person for the first time since the pandemic, but if you can’t be here in person, you can still register to attend today’s program and tomorrow’s “21st Annual Executive Compensation Disclosure Conference” online by visiting our online store or by calling us at 800-737-1271. Our conferences are bundled together into a single two-day event for registration and pricing, so your purchase will cover both events.
– How to Attend Online: Our conferences are hosted online through the RingCentral Events platform. When you register for the conferences, you’ll receive a registration confirmation email that will contain your personalized “Magic Link.” Just click on that link to be instantly directed to the event. The Magic Link acts as an “access pass” into the event. It is unique to you and cannot be shared with others. It bypasses the need for registered users to sign into RingCentral Events and brings you directly into your RingCentral Events account and into the event.
Once in the event, click the “Stage” button from the menu on the left of the webpage. In order to view the session currently playing on stage, you will need to press the play button on the video. If you need technical assistance, members of our team will be available within the platform and via email at info@ccrcorp.com to assist you throughout the conferences. If you need technical assistance, members of our team will be available via email at info@ccrcorp.com to assist you throughout the conferences.
– Access to Archives & On-Demand CLE: Your registration includes access to the conference archives, which will be available until October 15, 2025 – but you’ll need your confirmation email to access them so be sure to retain it! One big reason to make sure you do that is that if you can’t attend the conferences live, you may earn on-demand CLE credit by viewing the archives. See these “CLE FAQs for Archived Conference Sessions (ON DEMAND)” for more information.
– Thanks to Our Sponsors! A huge “thank you” to our sponsors who have helped make these events possible. Our platinum sponsor for this year’s conferences is Goodwin, our gold sponsors are Fredrikson and Kirkland & Ellis, our silver sponsors are Alliance Advisors, Cooley, Fintool, King & Spalding, Latham & Watkins, Morrison & Foerster, The Nuvo Group, and Wilson Sonsini. Our digital partner is Aon. Our media partner is Newsfile, and those of you who are attending in-person should be sure to check out our exhibitor, DragonGC. We are extremely grateful for the support of our sponsors!
Last week, ISS published the results of its most recent benchmark policy survey, and this year, respondents had quite a bit to say about poison pills. The survey is part of ISS’ annual global policy development process and was open to all interested parties to solicit broad feedback on areas of potential ISS policy change for 2025 and beyond. The survey’s results reflect responses from investors and non-investors. This latter group is comprised primarily of public companies & their advisors. Not surprisingly, the survey found that they differ when it comes to what’s acceptable when it comes to poison pills. Here are some of the highlights:
– When asked if the adoption by a board of a short-term poison pill to defend against an activist campaign was acceptable, 52% of investor respondents replied “generally, no”, while 65% of non-investor respondents replied “generally, yes”.
– When asked whether pre-revenue or other early-stage companies should be entitled to greater leeway than mature companies when adopting short-term poison pills, 56% of investors and 43% of non-investors said that such companies should be entitled to greater leeway on the adoption of a short-term poison pill, as long as “their governance structures and practices ensure accountability to shareholders.”
– When asked about whether a short-term poison pill trigger set by a board below 15 percent would be acceptable, the most common response among investor respondents was “No” (39%), while the largest number of non-investor respondents (38%) said “yes, the trigger level should be at board’s discretion.”
– When asked whether a “two-tier trigger threshold, with a higher trigger for passive investors (13G filers) would be considered a mitigating factor in light of a low trigger, 78% of non-investor respondents said “yes, it should prevent the pill from being triggered by a passive asset manager who has no intention of exercising control.” On the investor, while 41% agreed with the majority of non-investor respondents, 48% considered that “no, all investors can be harmed when a company erects defenses against activist investors whose campaigns can create value, so the lowest trigger is the relevant datapoint.”
Also, it turns out that investors like their pills to be “chewable.” The survey found that nearly 60% of investors found a qualifying offer clause in a pill to be important and a feature that should be included in every pill. A small majority (52%) of non-investors said that this feature was “sometimes important” depending on the trigger threshold and other pill terms.
Check out the latest edition of our “Timely Takes” Podcast featuring my interview with Remy Nshimiyimana and Oderah Nwaeze of Faegre Drinker regarding Delaware’s process for ratifying defective corporate acts. In this 10-minute podcast, Remy & Oderah covered the following topics:
– Overview of Delaware’s statutory procedure for ratifying defective corporate acts
– Examples of the types of defective acts that can be ratified under this statutory procedure
– Limitations on a corporation’s ability to ratify defective acts
– Shareholder approval requirements
– The Role of the Chancery Court
Our discussion was based on Faegre’s recent memo, “Ratification of Defective Corporate Acts: An Overview”, which members of TheCorporateCounsel.net can access in our “Delaware Law” Practice Area. If you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share, we’re all ears – just shoot me an email at john@thecorporatecounsel.net or send one to Meredith at mervine@ccrcorp.com.
We have many interesting topics on the agenda for our “Proxy Disclosure & 21st Annual Executive Compensation Conferences” next week – including color commentary about updated disclosure requirements that will apply for 2025, and what you need to do now to prepare. This Covington memo summarizes what will be new next year for calendar-year companies. At a very high level:
– File your insider trading policies and procedures as exhibits to Form 10-K
– Discuss your insider trading policies and procedures in your Form 10-K (or incorporated proxy)
– Provide narrative and tabular disclosure about the timing of stock options and option-like instruments in close proximity to disclosures of MNPI
The memo also recaps the many changes that became effective during 2024 – which of course we’ll need to continue to comply with going forward – as well as guidance on cyber incident reporting, universal proxy rules, pay-versus-performance, and XBRL tagging.
In case you forgot, the SEC’s climate disclosure rules were also adopted – and stayed – earlier this year. The memo recommends that companies keep thinking about how their disclosure controls and procedures may need to change if the rules do go into effect.
Yesterday, the SEC posted notice of an NYSE proposal that, if approved, would make it harder for penny stocks to linger around as listed companies. Here’s what the change would look like if adopted:
Notwithstanding the foregoing, if a company’s security fails to meet the Price Criteria and the company (i) has effected a reverse stock split over the prior one-year period or (ii) has effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 200 shares or more to one, then the company shall not be eligible for any compliance period specified in this Section 802.01C and the Exchange will immediately commence suspension and delisting procedures with respect to such security in accordance with Section 804.00.
Furthermore, a listed company may not effectuate a reverse stock split if the effectuation of such reverse stock split results in the company’s security falling below the continued listing requirements of Section 802.01A.
The proposed rule would apply to a company even if the company was in compliance with the Price Criteria at the time of its prior reverse stock split. The NYSE’s rationale for the proposal isn’t too surprising:
As described above, many companies seek to cure their noncompliance with the Price Criteria or seek to increase their stock price for other reasons by effectuating a reverse stock split. However, the Exchange has observed that some companies, typically those in financial distress or experiencing a prolonged operational downturn, engage in a pattern of repeated reverse stock splits. The Exchange believes that such behavior is often indicative of deep financial or operational distress within such companies rendering them inappropriate for trading on the Exchange for investor protection reasons. In these situations, the Exchange has observed that the challenges facing such companies, generally, are not temporary and may be so severe that the company is not likely to maintain or regain compliance on a sustained basis.
If this proposal looks familiar, it’s because Nasdaq has also been looking to rein in the use of reverse splits as a compliance strategy. As Meredith noted a few months ago, this type of rule change, if approved, would make it more important to strike the right balance in calculating a reverse split.
In addition to this proposal about reverse splits, the NYSE is shaking its fist at delinquents. The Exchange also proposed a rule change to say that it would not review a compliance plan submitted by a listed company that is below compliance with a continued listing standard if the company owes any unpaid fees to the Exchange. Under this proposal, the NYSE would immediately commence suspension & delisting procedures if the fees aren’t paid in full by the plan submission deadline or at the time of any required periodic review. Here’s the SEC notice for that one.
Earlier this week, the US Government Accountability Office released its annual report on the effectiveness of the SEC’s conflict mineral rule in promoting peace & security in the DRC and adjoining countries. This year, the GAO did not bury the lede, naming the report: “Peace and Security in Democratic Republic of the Congo Have Not Improved with SEC Disclosure Rule.” In fact, according to the GAO, the data shows that the rule has actually contributed to the spread of violence at some mines. Here’s an excerpt from the 1-page highlights:
GAO found no empirical evidence that the rule has decreased the occurrence or level of violence in the eastern DRC, where many mines and armed groups are located. GAO also found the rule was associated with a spread of violence, particularly around informal, small-scale gold mining sites. This may be partly because armed groups have increasingly fought for control of gold mines since gold is more portable and less traceable than the other three minerals. Further, GAO found that the number of violent events in the adjoining countries did not change in response to the SEC rule.
Page 13 of the report gives a good overview of the troubled journey of the conflicts mineral disclosure rule and the current Staff and Commission indications about enforcement.
The GAO did find that the rule has encouraged companies to take a closer look at supply chains, and it’s raised awareness about the risks that mineral purchases will benefit armed groups. But the GAO says that minerals are only one factor contributing to conflict in the DRC and adjoining countries, so “transparent sourcing” is both extremely challenging and inadequate on its own to meaningfully improve peace and security.
Many of our friends and readers are preparing for Yom Kippur today. We are sending wishes to everyone for a peaceful year.
In addition to comments from the Corp Fin Staff on cyber-related Form 8-K disclosures that Dave & Meredith previously shared, we’re beginning to see comment letters that the Staff has issued on Form 10-K cybersecurity disclosures. These disclosures were first required this year under Item 106 of Regulation S-K. Here’s a sampling of early comments (some of which I’ve paraphrased):
– We note that leaders from your information security, compliance and legal team oversee cybersecurity risk management. Please revise future filings to provide the relevant expertise of such persons or members in such detail as is necessary to fully describe the nature of the expertise as required by Item 106(c)(2)(i) of Regulation S-K.
– We note statements that you have not currently engaged any third-party service providers to support, manage, or supplement your cybersecurity processes, and that your Audit Committee receives updates from and discusses matters with your third-party IT support specialists. These statements appear inconsistent. Please revise future filings to clarify whether you engage assessors, consultants, auditors or other third parties in connection with your processes for assessing, identifying and managing material risks from cybersecurity threats as required by Item 106(b)(1)(ii) of Regulation S-K.
– We note you do not include Item 1C. Cybersecurity. Please revise or advise us why you do not provide disclosures as applicable under Item 106 of Regulation S-K.
Although comment letters are company-specific, these are the types of comments we’d expect to see out of the Disclosure Review Program as the Staff assesses “Year 1” compliance for this rule. The Corp Fin Staff isn’t looking to “play gotcha.” But if your disclosure has inconsistencies, or if you forgot to include Item 1C – or a specific element – you might be asked to correct that.
Yesterday, the SEC announced that it is monitoring the impact of Hurricane Milton on capital markets – and that it also continues to monitor the impact of Hurricane Helene. We continue to think of all those affected by these back-to-back catastrophic weather events.
The SEC will evaluate relief from filing deadlines as needed. Here’s more detail:
The SEC divisions and offices that oversee companies, accountants, investment advisers, mutual funds, brokerage firms, transfer agents, and other regulated entities and investment professionals will continue to closely track developments. They will evaluate the possibility of granting relief from filing deadlines and other regulatory requirements for those affected by the storms. Entities and investment professionals affected by Hurricane Milton or Hurricane Helene are encouraged to contact SEC staff with questions and concerns:
– Division of Examinations staff in the SEC’s Miami Regional Office can be reached by phone at 305-982-6300 or email at miami@sec.gov
– Division of Examinations staff in the SEC’s Atlanta Regional Office can be reached by phone at 404-842-7600 or email at atlanta@sec.gov
– Division of Corporation Finance staff can be reached by phone at 202-551-3500 or via online submission at www.sec.gov/forms/corp_fin_interpretive
– Division of Investment Management staff can be reached by phone at 202-551-6825 or email at imocc@sec.gov
– Division of Trading and Markets staff can be reached by phone at 202-551-5777 or email at tradingandmarkets@sec.gov
– Office of Municipal Securities staff can be reached by phone at 202-551-5680 or email at munis@sec.gov
