Join us at 2 pm eastern tomorrow for our “Conduct of the Annual Meeting” webcast to hear J.M. Smucker’s Peter Farah, Broadridge’s William Kennedy, Intuit’s Erick Rivero, and the one and only Carl Hagberg, Independent Inspector of Elections and Editor of The Shareholder Service Optimizer, offer practice pointers and discuss trends in meeting format & logistics, rules of conduct, and other matters companies will confront at their annual meetings.
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A few months ago, Dave blogged about SEC v. Panuwat, the agency’s novel insider trading action alleging that a corporate insider used MNPI about a pending acquisition of his company to unlawfully trade in the stock of a competitor that would be impacted by the deal. This “shadow trading” theory received a big endorsement last week, when a federal jury in San Francisco concluded after an eight-day trial that the executive had engaged in insider trading. Here’s SEC Director of Enforcement Gurbir Grewal’s statement on the jury’s decision:
“As we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple. Defendant used highly confidential information about an impending announcement of the acquisition of biopharmaceutical company Medivation, Inc., the company where he worked, by Pfizer Inc. to trade ahead of the news for his own enrichment. Rather than buying the securities of Medivation, however, Panuwat used his employer’s confidential information to acquire a large stake in call options of another comparable public company, Incyte Corporation, whose share price increased materially on the important news.”
This Proskauer blog discusses the case and points out that, like many other insider trading cases, this one was highly fact-specific:
The Panuwat verdict, like the prior court decisions, seems to have been fact-specific. For example, the jury’s materiality analysis presumably considered evidence showing that (i) the third-party issuer (Incyte) was one of only a limited number of companies in the acquisition target’s business and financial space; (ii) analysts had specifically cited the third party as a company that could be affected by the acquisition target’s transaction; (iii) the acquisition target’s investment banker had included the third party in the banker’s transaction analysis; and (iv) the trader had been directly involved in the underlying confidential corporate discussions and presentations concerning his employer’s sale. In addition, the SEC’s witnesses testified that the third party’s stock price was likely to be, and in fact was, positively affected by news of the Medivation acquisition. Changing any of those variables might have produced a different result.
The blog says that jury’s verdict may encourage the SEC pursue more “shadow trading”cases because the SEC appears to believe that there’s a lot of shadow trading going on. Since insider trading generally requires the trader to have breached a duty in trading on the basis of MNPI, the blog’s discussion of the kind of duties that a person engaging in shadow trading might be found to have breached is also helpful.
Last month, I blogged about the DOJ’s new whistleblower program. In February, the DOJ also announced a new AI initiative in which it will seek input from experts in the field of artificial intelligence in order to help DOJ understand and prepare for how AI will affect its mission. This excerpt recent CLS Blue Sky Blog post by two McDermott Will lawyers says that these two initiatives have significant implications for corporate boards’ oversight responsibilities:
First and foremost, the initiatives are a reminder of DOJ’s continuing commitment to corporate fraud enforcement and especially of is commitments to individual accountability. Among all the strategic and tactical challenges facing a company, the importance attributed to corporate responsibility is a constant. This may affect the board’s allocation of resources to the compliance function and its expectation of coordination between legal, compliance, and executive compensation functions.
Second, officers and directors will be called on to adjust the corporate compliance program to address an entirely new regime of risks arising from potential whistleblowers who are focused on indications of corporate fraud. Internal controls with respect to potential fraud must be sharpened, and overt efforts to demonstrate “tone at the top” should be increased to convince potential whistleblowers of the organization’s commitment to effective compliance. In addition, 24 Hour “hotline” reporting systems should be improved and anti-whistleblower retaliation protections enhanced.
Third, leadership should request a significant increase in the level of coordination between those responsible for internal direction of the company’s AI efforts and appropriate compliance and risk management executives. Until DOJ more clearly defines “disruptive technology risks,” this coordination should extend not only to the known risks and harms that can arise from AI and related technology, but also to the ways in which AI can be used to facilitate corporate fraud. Without further guidance from DOJ, this could require significant time and resources from the company.
The blog says that companies should expect pushback on coordination efforts from their tech leaders, who may not appreciate the need to address compliance issues, and says that the GC, CCO and CTO can be particularly valuable advisers to the board on its oversight efforts.
Meredith blogged last week about comments made during the “SEC Speaks” conference by Corp Fin General Counsel Michael Seaman concerning the application of the agency’s rules on shell companies in the context of reverse mergers. As part of that discussion, she linked to a Goodwin memo discussing Staff comments on shelf company issues in this context. Over on our Q&A Forum (Topic #11254), a member asked about a statement in that memo concerning the inability of affiliates to use the resale shelf S-1 filed after a reverse merger:
Curious about application of Rule 145(c) to affiliates and the following statement in tcc.net April 3 blog: “No Rule 145(c) Securities on the Form S-1 Resale Shelf: investors who were affiliates of the private company and receive securities of the public company in the RM (i.e., Rule 145(c) securities) will be statutory underwriters with respect to resales of those securities and, as such, the Staff has indicated that such securities may not be included in the Form S-1 resale shelf and instead may be sold only in a fixed price offering in which such investors are named as underwriters in the prospectus.” Seems that Staff may be applying this in contexts where they view the resale as a primary offering. Otherwise, I’m at a loss to see where the fixed price offering requirement is provided by Rule 145(c).
This was my response:
Yes, the Staff does view that situation as involving a primary offering. The problem is that because those shareholders are deemed to be underwriters, the offering is viewed as being an “at the market” offering made on behalf of an issuer that isn’t eligible to use Form S-3 for primary offerings. Only Form S-3 issuers are eligible to engage in a primary “at the market” offering. See Rule 415(a)(4) and Securities Act Rules CDI 612.14.
Last week, Meredith blogged about the debate over the possibility that the SEC’s climate rules might contain a “back door” through which Scope 3 emissions disclosures might be required. During the ABA Business Law Section’s “Dialogue with the Director” held on Friday, Corp Fin Director Erik Gerding confirmed that quantifying Scope 3 emissions in SEC filings is purely voluntary, and that the agency didn’t intend to introduce the possibility of a back door Scope 3 disclosure requirement. That’s welcome reassurance, but at the risk of being accused of seeing ghosts, I still think that some companies may face tough decisions about whether to “voluntarily” disclose Scope 3 emissions data.
In his remarks, Director Gerding acknowledged that while the rules don’t require Scope 3 disclosure, registrants with transition plans or targets & goals incorporating reductions in Scope 3 emissions will need to describe qualitatively how they are managing that process. That’s where I think things might get a little sticky, because the disclosure called for by the relevant Reg S-K line items is pretty granular. For example, Item 1504 requires registrants to address the following in their targets & goals disclosure:
– The scope of activities included in the target;
– The unit of measurement;
– The defined time horizon by which the target is intended to be achieved, and whether the time horizon is based on one or more goals established by a climate-related treaty, law, regulation, policy, or organization;
– If the registrant has established a baseline for the target or goal, the defined baseline time period and the means by which progress will be tracked; and
– A qualitative description of how the registrant intends to meet its climate-related targets or goals.
In addition, registrants must disclose any progress made toward meeting the target or goal and how any such progress has been achieved. Registrants are also required to discuss any material impacts to the business, results of operations, or financial condition directly resulting from the target or goal or the actions taken to make progress toward meeting it, and to provide quantitative and qualitative disclosures about material expenditures and impacts on financial estimates and assumptions directly resulting from the target or goal or actions take to make progress toward it.
As Sullivan & Cromwell pointed out in its memo on the climate change rules, “[g]iven the broad scope of the disclosure requirements under Item 1504, a company may need to disclose Scope 3 emissions metrics on an annually updated basis if it has a Scope 3 emissions reduction target that has materially affected, or is reasonably likely to materially affect, its business, results of operations or financial condition.”
I think the Staff is likely to take a hard look at Item 1504 disclosures during the review process. In light of Director Gerding’s comments, I doubt very much that the Staff will call for disclosure of Scope 3 emissions data in comment letters, but unless it applies a light touch, some of the comments on Item 1504 disclosure for companies with Scope 3 targets & goals could prove to be difficult to resolve. It seems plausible to me that after going a few rounds with the Staff on these comments, some companies may decide to “voluntarily” disclose Scope 3 data in order to resolve them.
One of the things that makes cybersecurity compliance particularly challenging is the mosaic of privacy and data protection laws and regulations that companies have to comply with. This FEI Daily blog from two PwC partners offers some advice to companies on how to manage their cyber compliance efforts:
There are several regulations at the state, federal and international level that organizations, particularly multinationals, should be focused on: NY DFS 500, the California Privacy Protection Agency’s (CPPA) draft Cybersecurity Audit and Risk Assessment Regulations, the EU’s GDPR and the SEC cyber rules, to name a few. Additionally, there is the anticipated CISA cyber incident reporting rule, coming as soon as March 2024. This patchwork of regulations will likely continue to grow in complexity in the months ahead.
So, how can companies untangle this — and where is the most effective place to begin? Start with understanding which regulations apply to your organization. Then, rationalize the common requirements between them and implement no regrets decisions to address those head on. Then, take stock of unique requirements for various geographies. Lastly, engage in public policy to help influence future regulation.
In this evolving regulatory climate, companies that embrace this new era of transparency are likely setting themselves up for success. Those who shy away from transparency do so at their own reputational risk.
The blog also identifies some other cybersecurity trends to watch in 2024 and offers tips on how companies can boost their defenses. These include investing in tools that will permit companies to scale their cloud security efforts and leveraging generative AI in their threat detection and analysis as well as in their cyber risk disclosure and incident reporting processes.
Don’t miss tomorrow’s free virtual event – “Developments in Human Rights Due Diligence, AI in ESG & Carbon Markets” – hosted by our colleagues at PracticalESG.com. You can register here for this 3-hour program, which will kick-off at 12:00 pm eastern tomorrow. This virtual event features three panels of experts who will provide insights into the intersection between supply chains & human rights due diligence, how AI may transform ESG supplier due diligence, problem solving & reporting, and developments in carbon markets.
These events are free to all – you don’t have to be a member of PracticalESG.com to attend. But if you’re attending events like these, you need the resources that PracticalESG.com provides. Become a member today by clicking here, emailing sales@ccrcorp.com or by calling (800) 737-1271.
The order details the various legal challenges and describes the multiple submissions to the Eighth Circuit requesting a stay pending judicial review. Following those submissions, the SEC moved to establish a consolidated briefing schedule encompassing all motions seeking a stay. That motion was opposed by 31 parties that urged the Eighth Circuit to expedite briefing on the already-filed emergency stay motions. It seems the SEC determined to use its discretionary authority under Exchange Act Section 25(c)(2) and Section 705 of the Administrative Procedure Act, which it may do if it finds “justice so requires,” after those oppositions were filed.
Don’t mistake the stay for an indication that the SEC is backing down from defending the rules in any way. The order makes this clarifying comment:
In issuing a stay, the Commission is not departing from its view that the Final Rules are consistent with applicable law and within the Commission’s long-standing authority to require the disclosure of information important to investors in making investment and voting decisions. Thus, the Commission will continue vigorously defending the Final Rules’ validity in court and looks forward to expeditious resolution of the litigation.
But the Commission finds that, under the particular circumstances presented, a stay of the Final Rules meets the statutory standard. Among other things, given the procedural complexities accompanying the consolidation and litigation of the large number of petitions for review of the Final Rules, a Commission stay will facilitate the orderly judicial resolution of those challenges and allow the court of appeals to focus on deciding the merits.
Further, a stay avoids potential regulatory uncertainty if registrants were to become subject to the Final Rules’ requirements during the pendency of the challenges to their validity.
Keep in mind that the order says nothing about the phased-in compliance dates, so what this might ultimately mean for whether and when companies, especially large accelerated filers, have to comply with the rules is unknown at this point — it’s still dependent on SEC action and/or how the litigation progresses. While the order notes that the SEC has used this authority twice before, that doesn’t give us any precedent to point to for the compliance timeline since both referenced rules were ultimately vacated (plus, as we all know, prior results do not guarantee a similar outcome).
It seems unwise to scale back or slow down compliance efforts — “regulatory uncertainty” already exists. Ultimately, given requirements in numerous other jurisdictions, mandatory climate reporting of one kind or another seems inevitable for many SEC registrants regardless of the fate of the SEC rules. And, as the amount of publicly available climate data increases, keep in mind that the SEC will continue looking at that and issuing comments or taking other action, with or without the final rules, per its 2010 climate disclosure guidance. Footnote 8 of the order clarifies that the stay does not impact that guidance.
During the morning panel and the Corp Fin Workshop on day 1 of SEC Speaks, a number of Staff participants discussed 2024 priorities for the Disclosure Review Program. As always, note that all Staff comments are subject to the standard disclaimer that the views are the person’s own in their official capacity and not necessarily reflective of the views of the Commission, the Commissioners, or members of the Staff, and our summaries are based on our real-time notes.
Cicely LaMothe, Deputy Director of Disclosure Operations, highlighted these three high-level priorities for 2024:
– Incorporating new rulemaking into the Disclosure Review Program
The Staff’s work doesn’t end with the adoption of a new rule — the Disclosure Review Program Staff gets up to speed, considers how disclosure documents are impacted and considers whether internal or external guidance needs to be updated and how to schedule reviews to make sure the team is covering appropriate filings. In the first year following effectiveness, the Staff tries to take a reasonable approach, recognizing that many companies are trying to make a good-faith effort to comply. In addition to confirming all requirements are met and you’ve carefully considered CDIs and other guidance, remember that most new rules have structured data requirements and if you incorrectly tag or fail to tag data, your disclosures are more likely to be more closely reviewed by the Disclosure Review Staff.
– Proactively addressing emerging issues
The Staff is continually monitoring world events that impact reporting companies and their disclosures, and they consider whether developments could be material to segments of companies that they review — for example, the market disruptions in the banking industry in early 2023. Companies should be doing the same and revisiting and updating descriptions in risk factors and MD&A as the landscape changes.
– Strategically engaging with stakeholders in both the above areas
Corp Fin Director Erik Gerding gave some more granular insight on disclosure topics that remain or have become top of mind for the Disclosure Review Program Staff in 2024. Here’s a non-exclusive list:
– Areas that involve judgment or where FASB or IASB have recently issued accounting standards (e.g., segment reporting)
– Non-GAAP compliance
– Critical accounting estimates disclosures in MD&A
– Disclosures regarding supplier finance programs in notes to the financial statements and in MD&A
– Disclosures by China-based issuers
– Inflation disclosures, ensuring that disclosure addresses particularized risks and impacts specific to the company
– Interest rate and liquidity risk disclosures
– Emerging areas, including AI and exposure to commercial real estate market changes
– Newly-required disclosures, including clawbacks, SPACs and cybersecurity
Yesterday, the SEC posted this notice & request for comment for a proposed NYSE rule change that would amend Section 102.06 of the NYSE Listed Company Manual to extend the period for which a SPAC can remain listed if it has signed a definitive agreement with respect to a Business Combination. As described below, this would better align NYSE’s approach with Nasdaq’s:
Section 102.06e of the Manual provides that the Exchange will promptly commence delisting procedures with respect to any listed SPAC that fails to consummate its Business Combination within (i) the time period specified by its constitutive documents or by contract or (ii) three years, whichever is shorter.
Section 102.06e requires the Exchange to promptly commence delisting procedures even for listed SPACs that have entered into a definitive agreement with respect to a Business Combination within three years of their listing date, but that are unable to complete the transaction before the three-year deadline established by 102.06e. As a practical matter, any such NYSE-listed SPAC would need to liquidate, transfer to a market that provides a longer period of time to complete the Business Combination, or face delisting.
The Exchange notes that Nasdaq’s SPAC listing requirements include a three-year limitation that is substantially similar to that included in the Exchange’s SPAC listing standard. However, Nasdaq appeal panels have granted additional time to SPACs that appeal their delisting for failure to consummate a Business Combination within three years in circumstances where the SPAC has a definitive agreement and requests additional time beyond the three years provided by the applicable rule to enable it to consummate its merger.
Accordingly, the amendment would provide that NYSE will commence delisting procedures with respect to any SPAC that fails to:
(i) enter into a definitive agreement with respect to its Business Combination within (A) the time period specified by its constitutive documents or by contract or (B) three years, whichever is shorter or
(ii) consummate its Business Combination within the time period specified by its constitutive documents or by contract or forty-two months, whichever is shorter.
