The May-June issue of “The Corporate Counsel” newsletter is in the mail. It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. This issue includes the following articles:
– SEC Adopts Amendments Requiring More Detailed Share Repurchase Disclosure
– What’s in a Name? Postponement, Adjournment and Recess of Stockholders’ Meetings
If you’re not already a subscriber, you can subscribe online to this essential resource or email sales @ccrcorp.com.
Mintz recently released a quantitative analysis of the SEC’s climate and ESG-focused comment letters issued from July 1, 2021 to March 31, 2023. The article categorizes the comments according to the nine topics identified by the SEC in its sample letter plus one additional topic — “greenwashing” — and considered the qualities of the reporting entities who received these letters to identify key characteristics. Here’s an excerpt from the summary:
Overall, a relatively limited number of these comment letters were issued by the SEC. Specifically, 104 reporting entities received comment letters echoing the topics in the SEC’s Sample Letter, and a further 167 reporting entities received a comment letter relating solely to greenwashing. It should also be noted that an overwhelming majority (86%) of the reporting entities receiving a letter solely concerning greenwashing were “Investment Entities” — funds, trusts, or other vehicles solely focused on investing in other companies or assets, rather than traditional companies.
And, while the SEC has continued to focus on the issue of greenwashing, most of the SEC comment letters concerning the climate change topics identified in the Sample Letter were issued either in September 2021 (when the Sample Letter was published) or in a second burst of activity from May–September 2022 — the SEC does not appear to have inquired about those topics since November 2022. Finally, it is also noteworthy that the reporting entities receiving a comment letter aligned with the topics identified in the Sample Letter were concentrated in the Energy & Transport or Manufacturing sectors — about two-thirds of the total.
The analysis found that once the SEC was sending a comment letter it took an “in for a penny, in for a pound” approach and covered a lot of ground in each.
Overall, it appears that the reporting entities that received questions corresponding to the topics identified in the Sample Letter were usually asked about a majority of those topics, and that Physical Effects, Capital Expenditures, Indirect Consequences, Compliance Costs, and Carbon Offsets were the most frequent climate change topics that were the subject of inquiry.
The findings on greenwashing seem to be the most surprising results of this analysis and possibly the most important as a takeaway, as the SEC’s comment letter focus with respect to climate change will eventually shift to the mandatory climate rules, if and when adopted.
But this analysis also revealed a consistent focus on issues pertaining to greenwashing — and the SEC’s inquiries into greenwashing, while concentrated on Investment Entities, were also spread among a number of Companies in a wide variety of industries. This focus by the SEC, despite the recent decline in the number of letters, may well persist.
In a recent opinion in New Enterprise Associates 14, L.P. v. Rich, (Del. Ch.; 5/23), Vice Chancellor Laster found a stockholder covenant not to sue for breach of the duty of loyalty—in the context of a sale of the company that triggered the drag-along provision in a stockholders’ agreement—partially enforceable. Here’s an excerpt from this Duane Morris blog discussing the opinion:
Conducting a deep-dive into the history and philosophical underpinnings of fiduciary law, the Court reasoned that specific, limited, and reasonable covenants not to sue are valid, but that Delaware abhors pre-dispute waivers of suit for intentional harms. The Court laid out a two-part test, sure to join the corporate practitioner’s lexicon of eponymous capital-t Tests swiftly:
“First, the provision must be narrowly tailored to address a specific transaction that otherwise would constitute a breach of fiduciary duty. The level of specificity must compare favorably with what would pass muster for advance authorization in a trust or agency agreement, advance renunciation of a corporate opportunity under Section 122(17), or advance ratification of an interested transaction like self-interested director compensation. If the provision is not sufficiently specific, then it is facially invalid.
. . .Next, the provision must survive close scrutiny for reasonableness. In this case, many of the non-exclusive factors suggested in Manti point to the provision being reasonable. Those factors include (i) a written contract formed through actual consent, (ii) a clear provision, (iii) knowledgeable stockholders who understood the provision’s implications, (iv) the Funds’ ability to reject the provision, and (v) the presence of bargained-for consideration.”
Emphasizing the placement of the convent in a stockholder-level agreement (versus the charter or bylaws) and that it only applied to a drag-along sale, which had to meet a list of eight criteria, VC Laster found the covenant to be enforceable, except to the extent it would relieve defendants of tort liability for intentional harm, which would be contrary to Delaware public policy. To make a successful public policy argument, the plaintiff must show bad faith.
This is neither here nor there, but the blog’s reference to VC Laster’s over-1,200-word footnote reminded me of Infinite Jest, the endnotes of which (fun fact!) have their own audio file on audible.com.
In late May, the SEC celebrated — by posting this video — the 90th birthday of the Securities Act! To commemorate this milestone year, I thought I’d highlight some of the fun, historical “stuff” posted on TheCorporateCounsel.net that I didn’t know was here until I joined as an Editor. If you’re a securities nerd or history buff — or both — I hope you enjoy!
I blogged yesterday about the anticipated timing for the most high-profile rulemaking on the SEC’s Spring 2023 Reg Flex Agenda. I also did a quick side-by-side comparison against the Fall 2022 Reg Flex Agenda to see whether there was anything new on the proposed list and noticed one notable rule that wasn’t in the earlier agenda — but has been on the SEC’s radar for quite some time.
As it turns out, Dave’s blog from mid-March on Dodd-Frank Act stragglers was prophetic. He suggested that the recent reminder of what it’s like to have major bank failures may renew focus on an unfinished piece of Dodd-Frank rulemaking, and here it is in the Reg Flex Agenda, slotted for April 2024.
Dave was referring to Section 956 of the Dodd-Frank Act, which directs multiple regulators to jointly prescribe regulations or guidelines for incentive-based compensation practices at covered financial institutions (specific types that have $1 billion or more in assets) and specifically prohibit any types or features of incentive-based compensation arrangements that encourage inappropriate risks by a covered financial institution:
(1) by providing an executive officer, employee, director, or principal shareholder of the covered financial institution with excessive compensation, fees, or benefits; or
(2) that could lead to material financial loss to the covered financial institution.
Under Section 956, a covered financial institution also must disclose to its appropriate regulator the structure of its incentive-based compensation arrangements sufficient to determine whether the structure provides excessive compensation, fees, or benefits or could lead to material financial loss to the institution.
As you might expect (or remember?), the SEC and six other regulators jointly proposed rules twice in the past. Dave’s blog has more details on the history here to refresh your memory.
In a recent blog, Goodwin reminds us that, for calendar year-end companies, the new disclosure regarding director and officer trading plans and arrangements adopted, modified or terminated on or after April 1, 2023 is required in the Form 10-Q for the quarter ended June 30, 2023. Earlier this year, Goodwin published an updated version of its Form 10-Q Checklist, including the new requirements. The blog also notes that SRCs have a little more time:
SRCs must comply with Item 408(a) for adoptions, modifications or terminations that occur on or after October 1, 2023 and provide this disclosure beginning with the periodic report that covers the quarter ending December 31, 2023. SRCs that have a December 31 fiscal year end will first include this disclosure for the fourth fiscal quarter of 2023 in their Form 10-K report for the year ended December 31, 2023.
Speaking of SRCs, Goodwin highlighted that public float day is coming up for companies with a December 31 fiscal year-end, which can have immediate implications for companies that newly qualify for SRC status as of the end of the second quarter:
A company that qualifies as a SRC as of the measurement date can elect to use some or all of the SRC disclosure accommodations in its next Form 10-Q report (i.e., the Form 10-Q report for its second fiscal quarter). If it does so, the company must check the SRC box on the cover page of the report. Beginning with the Form 10-Q report for the first fiscal quarter of the following year, the company must check the SRC box, even if it does not rely on the SRC scaled disclosure accommodations.
Of course, June 30th is a key date for filer status generally for public companies with a calendar year-end, and you’ll want to know your filer status sooner rather than later if there’s a chance it could change for next year.
The May-June issue of “The Corporate Counsel” newsletter is in the mail. It’s also available online to members of TheCorporateCounsel.net who subscribe to the electronic format. This issue includes the following articles:
– SEC Adopts Amendments Requiring More Detailed Share Repurchase Disclosure
– What’s in a Name? Postponement, Adjournment and Recess of Stockholders’ Meetings
If you’re not already a subscriber, you can subscribe online to this essential resource or email sales @ccrcorp.com.
Yesterday, the SEC’s Spring 2023 Reg Flex Agenda, which reflects the targeted timeframe for planned rulemaking, was released. Generally, it looks like the most significant, unfinished rulemaking previously targeted for April has been pushed out to October. Here are some highlights for rulemaking in the final rule stage:
Of course, these dates are aspirational and signify general timeframes versus precise dates. The Reg Flex Agenda can give insight into current (or, at least, as of April 10th) priorities of the Chair, but it isn’t a definitive guide for anyone trying to predict SEC rulemaking for purposes of specific board agendas, budget and workflow.
In mid-March, FASB issued an Exposure Draft to solicit public comment on proposed changes to ASU Topic 740: Income Taxes. Per FASB’s press release, comments were due May 30, 2023. As reported by CFO Dive, the proposal, which is the third time FASB has attempted to tackle this topic, would require more explicit accounting breakdowns of the taxes companies pay, and has elicited extensive feedback from companies and business and investor groups.
The comments ranged from something akin to “this is a non-starter” from the US Chamber of Commerce to investor groups stating that the new disclosures “fall short.” As a middle-of-the-road example, the comment letter from one corporate stakeholder urged FASB to provide companies sufficient time to comply since tax systems and controls will need to be updated. The FASB staff will now analyze the comments and present to the Board.
As Liz has blogged, “tax impact” has been growing as an ESG issue for a number of years, and tax transparency shareholder proposals are on the rise. So companies may be moving toward more tax disclosure whether or not FASB approves the proposed accounting standards update.
We’ve posted the transcript for our recent “Managing the New Buyback Disclosure Rules” webcast featuring Era Anagnosti of DLA Piper, Robert Evans of Locke Lord, Allison Handy of Perkins Coie, and Dave Lynn of Morrison Foerster and TheCorporateCounsel.net. Here’s an excerpt from Era Anagnosti’s comments on disclosure controls related to the new requirement to disclose the objectives or rationale of the repurchase program and the process or criteria for determining the amount of repurchases:
I also would focus on ensuring proper documentation for substantiating the objectives and the process used to determine the amount of repurchases. The board approves these repurchases, so it’s critical that in carrying out their fiduciary duties, the board’s process for determining these criteria and establishing the repurchase program is sound from a risk and liability perspective, considering the new disclosure requirements put a spotlight on this process.
We had several clients raise questions around, “What about existing repurchase programs that may still be effective by the time the rules go live?” Go back to look at what the board articulated as an objective and criteria at the time. That may not necessarily be up to par with a new disclosure requirement. It’s important for the board to reassess the objective and criteria of previously approved plans.
If you are not a member of TheCorporateCounsel.net, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
