The July-August issue of the Deal Lawyers newsletter was just posted and sent to the printer. This month’s issue includes the following articles:
– The Universal Proxy Card: Transforming Board Elections and Activism
– Anti-Activist Pills: Will Coster v. UIP Companies Sound Their Death-Knell?
– That Time I Filed the Registration Statement When I Wasn’t Supposed To …
In case the title of the last article caught your eye, it recounts the story of what John calls “one of his biggest legal career blunders,” although we are all relieved to say that it does have a happy ending. Anyway, the Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without in order to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
That was fast. On Friday, the SEC’s cybersecurity disclosures were published in the Federal Register. Here’s an excerpt from the release that explains what that means for the effective date & compliance dates:
The final rules are effective September 5, 2023. With respect to Item 106 of Regulation S–K and item 16K of Form 20–F, all registrants must provide such disclosures beginning with annual reports for fiscal years ending on or after December 15, 2023. With respect to compliance with the incident disclosure requirements in Item 1.05 of Form 8–K and in Form 6–K, all registrants other than smaller reporting companies must begin complying on DECEMBER 18, 2023. As discussed above, smaller reporting companies are being given an additional 180 days from the non-smaller reporting company compliance date before they must begin complying with Item 1.05 of Form 8–K, on June 15, 2024.
With respect to compliance with the structured data requirements, as noted above, all registrants must tag disclosures required under the final rules in Inline XBRL beginning one year after the initial compliance date for any issuer for the related disclosure requirement. Specifically:
– For Item 106 of Regulation S–K and item 16K of Form 20–F, all registrants must begin tagging responsive disclosure in Inline XBRL beginning with annual reports for fiscal years ending on or after December 15, 2024; and
– For Item 1.05 of Form 8–K and Form 6–K all registrants must begin tagging responsive disclosure in Inline XBRL beginning on DECEMBER 18, 2024.
Following up on the largest-ever award only a few months ago, the SEC announced on Friday that it bestowed $104 million upon 7 whistleblowers whose information and assistance led to a successful SEC enforcement action and related actions brought by another agency. The combined payout is the 4th largest bounty in the history of the Commission’s whistleblower program. Here’s more detail:
The seven whistleblowers were composed of two sets of joint claimants and three single claimants, and each provided information that either prompted the opening of or significantly contributed to an SEC investigation. The seven individuals’ assistance to the staff included providing documents supporting the allegations of misconduct, sitting for interviews, and identifying potential witnesses.
As usual, the order is full of redactions to protect the confidentiality of the whistleblowers. But this one does say that many of them are foreign nationals who shared info about misconduct in what were probably non-US territories, which is a reminder that the SEC’s whistleblower program applies to securities law violations and tips from anywhere in the world. The order also gives a peek into the jockeying amongst the whistleblowers for how the combined award would be divided, and explains why two other individuals were denied from sharing in the payment – including one of the company’s lawyers:
Claimant 8 does not qualify for a whistleblower award. Because significant portions of the information submitted by Claimant 8 appeared to be derived from his/her employment as an attorney for Subsidiary, the TCR and subsequent information Claimant 8 submitted was deemed potentially privileged by an Enforcement filter team and either redacted or withheld from investigative staff.
Accordingly, Claimant 8’s information did not cause the staff to open the Investigation or to inquire concerning different conduct, nor did it significantly contribute to the Investigation. Claimant 8’s contention in his/her response to the Preliminary Determinations that his/her information is not privileged is not relevant—the staff did not review significant portions of Claimant 8’s information and thus Claimant 8’s information did not lead to the success of the Covered Action.
As to Claimant 8’s contention in his/her response that staff said Claimant 8’s information was “highly relevant” and “valuable,” staff indicated in a supplemental declaration, which we credit, that while the staff spoke briefly with Claimant 8, the purpose of the conversation was to determine the nature of Claimant 8’s employment responsibilities at Subsidiary. When the staff learned of Claimant 8’s role as an in-house counsel, the staff ceased the conversation so as not to infringe upon any attorney-client communication. For these reasons, Claimant 8 is not eligible for an award.
Here’s a useful index of awards that a law firm has published in order to summarize what led the SEC to grant or deny each whistleblower claim through the program’s history. If you are reading this as a lawyer who has discovered questionable activity and you are daydreaming of retiring on a whistleblower award, I am sorry to remind you of these extra constraints on sharing information that would lead to a successful enforcement action. But don’t forget that you will still need to report “up the ladder” under SEC rules!
In this 18-minute episode of our “Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed Wilson Sonsini’s Amy Simmerman. Amy leads the firm’s Delaware office and governance practice, and serves on Wilson Sonsini’s board of directors. She also guest-lectures at Harvard Law and the University of Pennsylvania Law School on governance matters. Listen to hear:
1. What led Amy to law school and how she ended up practicing in Delaware
2. Amy’s thoughts on whether Delaware law permits boards to consider “stakeholders” other than shareholders, and trends that she’s seeing in the boardroom on this topic
3. Whether companies are continuing to convert to Public Benefit Corporations
4. Other notable corporate trends – and Amy’s views on the pace of change in our field
5. The most common scenarios in which non-Delaware lawyers should call a Delaware lawyer, but don’t … and advice for how other lawyers can best partner with Delaware counsel
6. What Amy thinks women in the corporate governance field can add to the current conversation on the role of corporations in society
To listen to any of our prior episodes, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
A recent Wolters Kluwer/Above the Law survey of 275 legal professionals has some interesting conclusions about generative AI’s potential implications for the legal profession – including which lawyers and practice areas will be at the greatest risk of being rendered obsolete by AI in the coming years. Here are some of the key findings:
– 62% of respondents believe that effective use of generative AI will separate successful law firms from unsuccessful firms within the next five years.
– More than 80% of all respondents agree that generative AI will create transformative efficiencies for research and routine tasks.
– Respondents are less convinced that AI will transform high-level legal work: 31% agree that this will happen, while 50% disagree.
– More than two-thirds of respondents believe that document review lawyers and librarians or others involved in knowledge management and research are at risk of obsolescence because of generative AI.
When it comes to this final point, a Legal Dive article on the survey gets a little more specific on AI’s potential impact on law jobs:
Roughly 71% said generative AI could replace document review lawyers within the next decade, and 68% said they could see a similar impact on law librarians. Roughly 41% said paralegals could become obsolete in the next 10 years, with no other listed position cited by more than 26% of respondents.
Only 19% of survey respondents indicated that law firm associates were at risk of becoming obsolete, and only 2% said that law firm partners were likely to be replaced by generative AI. Some respondents weren’t as gloomy about AI’s impact on jobs as the overall numbers might suggest. The Legal Dive article cites one legal operations professional as saying that “[r]oles will evolve but not necessarily become obsolete” and quotes a law professor who said, in effect, that people who embrace the technology will do well, while those that can’t leverage AI will be at risk.
In terms of AI’s impact on specific practice areas, the survey found that corporate, trusts & estates, litigation, IP and tax are the areas most likely to be significantly affected by generative AI, while criminal/white collar law and environmental/energy law are expected to be affected the least.
The DOJ, Commerce (BIS) & Treasury (OFAC) recently issued guidance in the form of a “Compliance Note” regarding the voluntary self-disclosure to these agencies of violations of US sanctions and export control laws. A recent Hunton Andrews Kurth memo provides an overview of the Compliance Note, which lays out how timely, voluntary self-disclosure of potential violations can significantly mitigate civil or criminal liability.
For example, this excerpt from the memo discusses the position of the DOJ’s National Security Division on how voluntary self-disclosure can eliminate criminal penalties for violations:
The Compliance Note clarifies DOJ’s position that moving forward, where a company voluntarily self-discloses potentially criminal violations of US sanctions and export laws, fully cooperates, and timely and appropriately remediates the violations, NSD generally will not seek a guilty plea; rather, there will be a presumption that the company will receive a non-prosecution agreement and will not pay a criminal fine.
The memo notes that the presumption will not apply in cases with certain aggravating factors, such as pervasive criminal misconduct, concealment or involvement by upper management, repeated violations of national security laws, the export of particularly sensitive items or the export of material to end users who make the Nat Sec folks’ hair stand on end.
Reg A+ has become an increasingly popular way for small companies to access the public markets in recent years, but as Meredith blogged a few months ago, the growth in the number of Reg A offerings has been accompanied by compliance issues that have attracted the attention of the SEC’s Division of Enforcement. If you’d like to get up to speed on the SEC’s concerns about Reg A+ deals, check out this recent Goodwin memo, which highlights both recent enforcement actions and comment trends.
This excerpt addresses the Staff’s comments on potential “at-the-market offerings” which aren’t permitted under Reg A+ and which have also been the subject of enforcement proceedings:
Similar to the Enforcement Division proceedings noted above, a number of comments focused on whether Reg A+ issuers were conducting delayed offerings or offerings at other than a fixed price. As noted above, delayed offerings and at-the-market offerings are not permitted under Reg A+. One issuer argued that the offering was not an at-the-market offering because there was no existing trading market for the issuer’s securities. It is unclear if the Staff accepted this argument or one of the other arguments made by the issuer that the offering was not an at-the-market offering. We agree that an offering should not be considered an at-the-market offering if there is no “existing trading market.”
If you’ll permit me, I’d like to close this blog by noting sort of a personal milestone – this is my 1,000th blog on TheCorporateCounsel.net and it comes on the same week as I celebrated my 7th anniversary of joining the team here. I’d like to say thanks to each of you for reading these blogs over the years & for reaching out to share your own insights. I’ve had a lot of fun and hope to continue to hang around here for a few more years or until our generative AI overlords kick me out, whichever comes first.
Last Friday, Nasdaq filed a proposed rule with the SEC that would establish listing standards related to notification and disclosure of reverse stock splits. According to the filing, Nasdaq has seen a significant increase in reverse splits over the past two years, most of which involve small cap issuers trying to maintain the $1.00 minimum bid price required to keep their stock listed. These issuers typically don’t receive a lot of media or analyst coverage, and that seems to be driving Nasdaq’s push for notification & disclosure requirements. This excerpt from the rule proposal explains the reasons for it & provides a general overview of what would be required:
Nasdaq believes that the increase in companies effecting reverse stock splits warrants amendments to the listing rules to enhance the ability for market participants to accurately process these events, and thereby maintain fair and orderly markets. As such, Nasdaq is proposing amendments to its rules regarding notification and disclosure of reverse stock splits and regulatory halts.
Specifically, Nasdaq is proposing to adopt additional listing rules requiring a company conducting a reverse stock split to notify Nasdaq about certain details of the reverse stock split at least five (5) business days (no later than 12:00 p.m. ET) prior to the anticipated market effective date, and make public disclosure about the reverse stock split at least two (2) business days (no later than 12:00 p.m. ET) prior to the anticipated market effective date.
As part of the rule proposal, references to a reverse stock split currently contained in Listing Rule 5005(a)(44) would be deleted and new provisions added to set forth the timeframe and requirements for the new notification and disclosure requirements. The comment period for the proposal will expire 21 days after publication in the Federal Register, which hasn’t happened yet. Check out Cydney Posner’s blog for more details on the proposal.
What alternatives do companies have if they disagree with their auditors concerning an accounting issue? This recent blog from Perkins Coie’s Ben Dale – himself a recovering auditor – discusses some of the options. Here’s an excerpt:
AS 1301.22 states in relevant part: “The auditor should communicate to the audit committee any disagreements with management about matters, whether or not satisfactorily resolved, that … could be significant to the company’s financial statements or the auditor’s report.” Importantly, disagreements with management don’t include differences of opinion based on incomplete facts or preliminary information that are later resolved by the auditor after obtaining additional relevant facts or information prior to the issuance of the auditor’s report.
In the four years I worked as an auditor, I never saw a disagreement with management make it to the audit committee. Rather, they were kept within the management ranks for several days or weeks while the auditors and management performed additional procedures, reviewed all relevant information and sought resolution of their disagreement. Only if the disagreement persisted at the end of the audit after all efforts were made to resolve it, would it be elevated to the audit committee (assuming it was significant to the financials or audit report).
If a disagreement remains unresolved after escalation to the audit committee, the company or auditor could choose to seek advice directly from the SEC Staff. While the SEC Staff may provide interpretive guidance on issues arising under GAAP or certain securities regulations, they are highly unlikely to referee disputes between companies and auditors – and notably, communications with the SEC may not remain confidential.
The blog says that, ultimately, you could also go nuclear and fire the auditor, but that’s a “whole ‘nother bag of snakes.” As a practical matter, the big problem with a potential disagreement is that the issue typically arises when the clock is ticking on your next SEC filing. If the auditor won’t sign off on the financials in your 10-K or provide a consent for your registration statements, then you ultimately don’t have a lot of good alternatives except to see things their way – and that may be the biggest reason why these seldom even make it to the audit committee.
Check out the latest edition of our “Timely Takes” Podcast featuring my interview with Sidley’s Beth Berg, Paul Choi & Jim Ducayet on issues associated with earnings pre-releases. In this 19-minute podcast, Beth, Paul and Jim addressed the following topics:
– Legal issues that might compel an earnings pre-release
– Typical voluntary pre-release scenarios
– Key business and investor relations considerations
– Legal risks and compliance obligations around the pre-release decision
– Participants in the decision-making process
– Earnings pre-release “dos and don’ts”
Our discussion was based on Sidley’s recent memo, “Earnings Pre-Release Considerations”, which members of TheCorporateCounsel.net can access in our “Earnings Guidance” 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, I’m all ears – just shoot me an email at john@thecorporatecounsel.net.
