FinCEN will comply with the court’s order for as long as it remains in effect. As a result, the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.
The implication being that FinCEN will continue to enforce the CTA with respect to other entities. The March 1 as of date in FinCEN’s announcement also clarifies that joining the NSBA after the March 1 decision will not shield those new members from enforcement.
This is consistent with some conversations that were already happening on LinkedIn and takeaways in client alerts. This Morgan Lewis memo notes the following:
The injunction against enforcement only applies to the plaintiffs in the Alabama litigation, and despite the holding that the CTA is unconstitutional, the government is entitled to continue to enforce the statute against other entities.
As a result, our recommendations to companies regarding the CTA remains unchanged. Until clearer guidance is provided, companies should continue to comply with the CTA’s BOI reporting requirements.
As Dave shared, the Small Business Capital Formation Advisory Committee met last week Tuesday to discuss the accredited investor definition (again) and the state of the IPO market. During the meeting, a number of the Commissioners shared prepared remarks — each of which is discussed in this blog from “Jim Hamilton’s World of Securities Regulation.” Following the prepared remarks, the Committee voted in favor of three recommendations, which this Mayer Brown blog summarizes as follows:
– The current net worth and income thresholds in the definition should not be indexed for inflation;
– Non-accredited investors should be permitted to invest up to five percent of their income or net worth in private offerings annually if they meet certain sophistication criteria or pass a certification exam; and
– The SEC should require a risk statement to be included in private placement documents.
In terms of next steps, the blog says the SEC is expected to consider amendments to the definition during the course of this year, including the Committee’s recommendations, the SEC Staff report and any comments submitted in response to the report.
In January, Liz shared this Locke Lord blog explaining why the “public company” exemption for the Corporate Transparency Act isn’t enough to insulate public companies from having to conduct a compliance review for all subsidiaries or investment entities and install new internal controls. And since public companies are unlikely to have benefited from the limited injunction in National Small Business United v. Yellen (N.D. Ala.; 3/24), preparing for CTA compliance is still necessary — for now — if and until there’s a national injunction or further guidance is provided.
In the latest Timely Takes Podcast, John speaks with Rob Evans and Ryan Last of Locke Lord for more on public company CTA compliance. In the podcast, Rob and Ryan discuss when the CTA applies, set forth the key dates and then identify tasks involved in preparing a public company for compliance with the CTA going forward, giving a framework that public company counsel may consider for CTA compliance.
In the latest “Deep Quarry” newsletter, Olga Usvyatsky shares takeaways from SEC comment letters to sixteen companies issued between January 2023 and February 2024 focused on adjustments for legal expenses in non-GAAP numbers. She found that the companies receiving these comments had some common characteristics:
– Involvement in a mix of routine and non-routine legal cases;
– A high impact of litigation charges on the non-GAAP bottom line;
– A generic title of the non-GAAP line that does not specify which cases are excluded in the non-GAAP calculations.
The blog then discusses in detail the treatment of IP-related litigation costs — particularly for companies with businesses that would ordinarily involve IP litigation — and whether adjusting for those costs is appropriate under Regulation G. It cites an instance where the SEC disagreed with the company’s arguments that litigation expenses were non-routine due to the “size, scope, complexity and frequency.” The SEC focused on the fact that IP litigation arises in the ordinary course given the nature of the company’s business and products.
But even for companies where IP-related litigation is common, the analysis remains very fact-intensive. The newsletter describes another comment letter where the company successfully argued that an adjustment was appropriate for one specific IP matter. The blog highlights that the company treated costs associated with all other IP litigation matters as ordinary course and did not adjust for them in non-GAAP measures.
This Public Chatter blog from Perkins Coie discusses something you’ll likely encounter (or have encountered) at some point in your career — a non-executive director has a personal matter that may make it difficult for them to continue in their role. The blog gives examples of a director needing a medical procedure or taking time to care for a family member. Directors are people and, as the blog says, “life happens.” What options are open to the company and the director in this case?
As the blog notes, the availability of virtual attendance has allowed directors unable to travel to continue to attend meetings and fulfill their fiduciary duties, and happily, it’s no longer unusual for directors to attend virtually, even if most of the board is together in one room.
When the director’s circumstances involve more than just an inability to travel, the concept of a director leave of absence may arise. Here’s what the blog says on that:
State Law Allows a Director to be “In” or “Out”: No Middle Ground. You’ll be looking to state law – in the state in which your company is incorporated – and when you look, I doubt a leave of absence would be allowed under state law since directors are elected and then remain on until the end of their term (or until resignation). A director isn’t like an employee who could take a paid or unpaid leave. Instead, a director has fiduciary responsibilities from the moment of election or appointment, until the moment of resignation.
So don’t think you could give a director a valid leave of absence under state law that would relieve the director of fiduciary duties during the leave. And taking a “leave” would in effect prevent the director from actively fulfilling those duties.
It’s also not possible to get around this with a sort of temporary resignation:
Directors Can’t Resign With a Promise to Renominate Them. If a director is going to be totally unavailable for a year, they should resign and stay in touch if they want to – but with no promise of nomination a year later.
When that director says they are ready to rejoin the board, the nominating committee must evaluate the board’s needs at that time. Because of the importance of creating a board whose members, as a whole, match the challenges that the corporation is then facing, the former director’s skills and background would need to be reassessed at that future date. Or perhaps the board size is such that there simply isn’t a need to enlarge the board by one at that time. It is what it is.
Proxy disclosure is an important consideration when determining whether the director’s circumstances permit continued meaningful participation virtually or whether a resignation is more appropriate. The blog says that any directors faced with personal issues that may make it challenging to attend even virtual meetings should be reminded of the obligation to disclose attendance of less than 75% of the meetings of the board and each applicable committee in the year. If the resignation route is pursued and the board may consider a future renomination, the blog suggests that the company may want to note that in the resignation 8-K.
Here’s something John shared last week on DealLawyers.com:
Stockholders’ agreements are a common feature in a variety of transactional settings, and the rights and obligations they impose are often an essential part of the deal. That’s why the Delaware Chancery Court’s recent decision in West Palm Beach Firefighters v. Moelis & Company, (Del. Ch.; 2/24) voiding key provisions of a “new-wave” stockholders’ agreement merits close review by everyone involved in the dealmaking process.
The case focused on pre-approval rights for key corporate decisions and director designation rights granted by Moelis to the company’s founder in a stockholder agreement. The transactions requiring the founder’s prior approval included stock issuances, financings, dividend payments and senior officer appointments. The director designation rights & related governance provisions were intended to ensure that the founder could designate a majority of the members of the board and, among other things, required the company to recommend shareholders vote for any candidate designated by the founder.
Vice Chancellor Laster concluded that the pre-approval and governance rights contained in the agreement ran afoul of Section 141(a) of the DGCL, which says that “the business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.” This excerpt from Goodwin’s memo on the decision summarizes the basis for the Vice Chancellor’s decision:
[P]laintiff argued that the challenged provisions in the Stockholder Agreement violate Delaware law because they effectively remove from directors “in a very substantial way” their duty to use their own best judgment on matters of management. Meanwhile, the Company argued that Delaware corporations possess the power to contract, including contracts that may constrain a board’s freedom of action, and the Stockholder Agreement should not be treated any differently.
After a painstaking analysis of applicable Delaware cases, the court found that several of the Board Composition Provisions, and all of the Pre-Approval Requirements, were facially invalid under Delaware law. The court decided that each of the Pre-Approval Requirements went “too far” because they forced the Board to obtain Moelis’s prior written consent before taking “virtually any meaningful action” and, thus, “the Board is not really a board.”
The Goodwin memo also points out that the key problem here was that the rights at issue weren’t contained in the company’s certificate of incorporation. It also contends that the biggest takeaway from the case is that investors are likely to insist on including these provisions in charter documents, rather than in the agreement itself.
Importantly, VC Laster did not hold that all of the contractual investor rights challenged by the plaintiff were invalid on their face. For example, he said that a director designation right didn’t necessarily violate Section 141(a) of the DGCL. Instead, the problem in this case was that it was coupled a recommendation requirement compelling the board to support the designated candidate no matter what:
“The Designation Right does not violate Section 141(a) because it only permits Moelis to identify a number of candidates for director equal to a majority of the Board. The Company can agree to let Moelis identify a number of candidates. What the Board or the Company does with those candidates is what matters. The Recommendation Requirement improperly compels the Board to support Moelis’ candidates, whomever they might be. But there is nothing wrong with a provision that lets Moelis identify candidates.”
Traditionally, I think companies haven’t been completely insensitive to this issue, and many stockholders’ agreements include some sort of a fiduciary out when it comes to a recommendation requirement. But as Meredith blogged last summer, when it comes to activist settlements, boards haven’t always been cognizant of the limitations imposed by their fiduciary duties when negotiating the terms of those agreements. Moelis should serve as a reminder that those agreements don’t just have to satisfy Unocal, they also need to avoid running afoul of the limitations imposed by Section 141(a).
Hughes Hubbard attorneys represented the NSBA in the case and the firm describes the lawsuit and the decision in this announcement.
On Nov. 15, 2023, NSBA filed suit in the Northern District of Alabama, alleging that the Corporate Transparency Act exceeded Congress’ Article I constitutional powers and infringed upon individual constitutional rights by forcing ordinary Americans to hand over sensitive, personal information to a Financial Crimes Enforcement Network (FinCEN) law-enforcement database. NSBA sought an immediate injunction against the implementation of the CTA and FinCEN reporting rules.
The order found that the CTA exceeds Congress’ authority under Article I of the Constitution and did not address the NSBA’s other challenges under the First, Fourth, and Fifth Amendments:
The court acknowledged that the ultimate policy goals of the statute, in terms of countering money laundering and terrorism financing, are laudable. But the court concluded that Congress cannot attempt to achieve laudable goals through means that are outside its powers under the Constitution—either because (as the court found) Congress is legislating activities like entity formation that the Constitution leaves to the states, or because (as NSBA also contended) Congress is forcing ordinary and innocent Americans to hand over personal and sensitive information to a database dedicated to criminal investigations even though those citizens have done nothing wrong and there is no reason to suspect that they have.
An appeal seems highly likely, so stay tuned!
Thanks to my former colleague Angela Gamalski of Honigman for sharing this update on LinkedIn over the weekend!
In late December, Dave shared the first Form 8-K filed under the new cyber incident reporting regime. He noted “someone always must be first” to file. This unlucky company was also first to receive a comment. Hat tip to Emily Sacks-Wilner of Fenwick for sharing these first SEC comment and company response letters on disclosures under Item 1.05 of Form 8-K.
In its 8-K, the company disclosed that “the incident has had and is reasonably likely to continue to have a material impact on the Company’s business operations until recovery efforts are completed.” Relying on Instruction 2 to Item 1.05, it also stated that “the full scope, nature and impact of the unauthorized occurrences were not yet known” and the company hadn’t yet “determined whether the incident is reasonably likely to materially impact the Company’s financial condition or results of operations.”
It seems the SEC took this first filing as an opportunity to send a reminder that the amended 8-K (which must be filed to report the information called for by Item 1.05 that was not determined or available when the initial 8-K was filed) must describe the scope of the business operations impacted and the known material impacts the incident has had and those likely to continue. The comment letter continues:
In considering material impacts, please describe all material impacts. For example, consider vendor relationships and potential reputational harm related to stolen data and unfulfilled orders, as well as any impact to your financial condition or results of operations.
The company simply acknowledged the comment and noted that the amended 8-K will address these items.
The January-February issue of The Corporate Executive has been sent to the printer (email sales@ccrcorp.com to subscribe to this essential resource). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format.
The issue includes the timely article “Cybersecurity: What Do the New Form 10-K Disclosures Look Like?” summarizing observations on how companies are approaching new Form 10-K cybersecurity disclosures based on a review of 25 Form 10-K filings from a group of large accelerated filers from a broad cross-section of industries.
Yesterday, the Council of Institutional Investors sent this letter to the SEC to request that the Commission initiate rulemaking to require a technological solution to the issue of “traceability.”
The rulemaking petition says that the 2023 decision in Slack Technologies, LLC v. Pirani has jeopardized investor protection. In the Slack case, the SCOTUS held that an investor plaintiff who is seeking a remedy under Section 11 of the Securities Act must prove that the shares that they hold are traceable to a registration statement. That is particularly difficult to do in the direct listing context because unregistered shares enter the market and begin trading alongside registered shares. If there are lockup waivers, traceability may also be an issue in a traditional IPO.
The letter acknowledges that a working group has already urged rulemaking to amend Rule 144 to address this issue (which CII also supported, but it hasn’t gone anywhere). CII says that alternatively, the Commission should consider a technological solution. Here’s an excerpt:
Two potential approaches have been recently identified by former SEC Chair Jay Clayton and former Commissioner Joseph A. Grundfest. In a brief filed as amici curiae in the Slack case they stated that the Commission could:
1. Require that registered and exempt shares offered in a direct listing trade with differentiated tickers, at least until expiration of the relevant Section 11 statute of limitations; or
2. Migrate the entire clearance and settlement system to a distributed ledger system or to
other mechanisms to allow the tracing of individual shares as individual shares, and not as fractional interests in larger commingled electronic book entry accounts.
We note that the second more ambitious approach is aligned with the recommendation CII submitted to the SEC in connection with its 2018 Roundtable on the Proxy Process.
The letter also notes a third alternative that was the subject of a recent study from Columbia Law Professor & Director of the Center on Corporate Governance John Coffee and his colleague Joshua Mitts: adapting the detailed trading records that broker-dealers already maintain as part of the consolidated audit trail – and requiring production of these records to private plaintiffs in Section 11 litigation.
I don’t know enough about broker-dealer record-keeping requirements to gauge whether this would be as minimal a lift as the cited study makes it out to be. I do know that broker-dealers generally aren’t clamoring for more recordkeeping requirements….
