The March-April Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This issue includes the following articles:
– Insights from Experience – Acquiring Public Benefit Corporations
– Private Company Mergers of Equals: A Primer for Companies and Investors
– Sale of Business Non-Competes: On the Way Out?
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.
Yesterday, the SEC posted notice – for the NYSE, Nasdaq and other SROs – that it would designate a longer period for taking action on proposed listing standards to implement Dodd-Frank clawback rules. This action follows comment letters that were submitted earlier this month to urge a longer lead-time – and it’s welcome news to anyone trying to keep up with the demands of recent SEC rulemaking.
That said, don’t get too excited. For each exchange, the Commission has designated June 11th as the date by which it will either approve or disapprove – or institute proceedings to determine whether to disapprove – the proposed rule change. Under Section 19(b)(2) of the Exchange Act, that’s the outside date of 90 days from the date the notices of these proposals were published in the Federal Register. If the Commission hadn’t designated this longer period, it would have had to act by April 27th.
The lingering issue presented by this June date is that the original proposals from the exchanges said that they’d be effective on the date approved by the SEC (see pg. 31 of the NYSE’s proposal and pg. 31 of Nasdaq’s proposal). So, unless the exchanges amend that portion of their proposed listing standards, if the SEC approves them in June, that’s when they’ll go effective. That will start the 60-day clock for listed companies to adopt a compliant clawback policy – putting the deadline in early August. That’s still a lot earlier than many folks originally expected, and means you can’t delay work on your clawback policy.
We’ll continue to cross our fingers that this plays out more in line with the originally expected timeframe of a November effective date for the exchange listing standards and a January 2024 compliance date. Keep following this blog for updates & practical guidance as the date nears (one way or the other) – and make sure to use the resources available in our “Clawbacks” Practice Area (including a sample policy). And, mark your calendars for our “Proxy Season Post Mortem” webcast – 2pm ET on Tuesday, June 27th, as we’ll touch on this as a “hot topic.” As always, an archive replay and transcript will be available to members following the live program.
If you aren’t already a CompensationStandards.com member with access to these resources, start a no-risk trial today! Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.
The first of what may be many shareholder derivative suits related to the Fox News coverage of the 2020 Presidential election was filed on April 11, and multiple legal minds have already weighed in on why this may be one for the books. Over on the Business Law Prof Blog, Ann Lipton discusses whether these allegations should appropriately be the basis of a Caremark claim.
She points out that Caremark’s original principle—that that a corporation might fail to comply with the law, and suffer related penalties, due to bad faith neglect by the directors—was subsequently expanded to encompass the concept that illegal conduct can’t be permissible corporate behavior even if the directors reasonably concluded that lawbreaking could have been profitable. Massey claims, she points out, can apply when directors are pursuing the best interest of the corporation but doing so in an impermissible way, and this view represents the outer limit of shareholder primacy in that it’s “rooted in concern for the welfare of nonshareholder constituencies.”
But the derivative claims against the Fox directors and officers involve defamation. Here’s an excerpt from her blog:
Given this frame, the question becomes, where does “defamation” fit on this scale? Does it count as illegal, ultra vires conduct? Or can it be a legitimate business decision that becomes a breach of duty only in “prong one” situations, or, I could imagine, if defamation is permitted not because directors believe it to be wealth-maximizing for the firm, but because directors are advancing their own political commitments? In the Fox case, the stockholder plaintiff alleges that the Fox Corp board intentionally permitted false claims to air because it was fearful of losing viewers. In other words, the actual allegation is that the board was trying to maximize shareholder wealth – not that it neglected its duties, and not even that false political claims benefitted board members personally.
Further, Delaware allows “efficient breach” of contract—directors can choose to break a contract if they decide it’s profitable to do so. In asking whether it’s logical to treat tort law differently than contract law, she points out that tort claims permit punitive damages, so perhaps defamation should be treated as unauthorized behavior and a contract breach can be distinguished as priced behavior.
Following last week’s announcement that Fox agreed to settle with Dominion, Kevin LaCroix also blogged about these claims on The D&O Diary. He notes that, while Caremark claims are notoriously difficult to sustain, after the settlement, there’s more support for the argument that the alleged misconduct harmed Fox.
John recently blogged about one notable group missing from the Slack direct listing appeal—the SEC. If you’re into the inside baseball here, Cydney Posner’s Cooley PubCo blog thoroughly and compellingly covers the oral arguments, including how some of the Justices may be leaning. It seems that the SEC’s absence was giving SCOTUS some heartburn and, to the extent the SEC struggled with this case, it was in good company:
When it came to considering the practical impact of any decision, the Justices seemed, to some extent, caught between Scylla and Charybdis—overturning the 9th Circuit to mandate tracing to the registration statement, as Slack requested, could mean allowing a mechanism to avoid Section 11 liability completely; taking the broad approach that Pirani advocated (and the 9th Circuit took) could mean substantially expanding and extending liability. The challenge was how to navigate those waters?
. . . Justice Sotomayor said that she had “read some commentators suggesting that the [SEC] is having trouble with this case and doesn’t know what to do.” Chief Justice Roberts added that they “[m]ay not be the only one.”
Back in 2017, S&P announced that it would not add any new companies with “multi share class structures” to the S&P Composite 1500 Index and its component indices, including the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600. As highlighted by this Simpson Thacher alert, under S&P’s restrictive eligibility criteria, this meant that companies going public with an “UP-C” structure with multiple classes—even with equal voting rights—were excluded, in addition to companies going public with high vote/low vote class structures.
S&P reversed course in a recent announcement, effective immediately. Here’s Simpson Thacher’s take:
Following a consultation with market participants that commenced in late 2022, on April 17, 2023, S&P announced that companies with multiple share classes will again be considered eligible for inclusion in the S&P Composite 1500 Index and its component indices provided they meet all other eligibility criteria. We believe this is the right outcome for investors who are looking to broad-based market indices to track the entire investable universe and permits companies seeking to go public to adopt the capital structures that best suit their circumstances without adversely impacting eligibility for future inclusion in the S&P Composite 1500 Index and its component indices.
The SEC’s most recent non-GAAP enforcement action has triggered new calls for companies to adopt non-GAAP policies if they haven’t already. That’s partly because, as John blogged, the SEC raised the company’s alleged failure to adopt disclosure controls & procedures specific to non-GAAP measures. If you’re looking to adopt a non-GAAP policy, or revamp your existing policy, consider these tips from Gibson Dunn’s Securities Regulation and Corporate Governance Monitor:
Companies Should Have Disclosure Controls and Procedures in Place to Identify and Disclose Non-GAAP Adjustments. It is crucial for accounting, legal and other personnel responsible for public reporting to be familiar with SEC reporting requirements as they pertain to non-GAAP measures, and the company’s disclosure controls and procedure documentation should specifically address steps and controls in place to identify amounts relevant for non-GAAP adjustments and make non-GAAP disclosures. Employee determinations of non-GAAP adjustments should be guided by, and evaluated in light of, such disclosure controls and procedures and any other non-GAAP policies that a company determines may be appropriate to adopt. In addition, policies and procedures should be designed to help ensure the accounting and legal departments are able to engage in a thorough review and approval process of proposed non-GAAP adjustments, with a view to accuracy, consistency and overall compliance.
Descriptions of Non-GAAP Measures Should Be Kept Consistent with Actual Accounting Practices. To be effective, companies’ disclosure controls and procedures should include processes designed to help ensure that non-GAAP financial measures and adjustments are described accurately in periodic filings, earnings releases and other public statements. Companies should routinely assess whether the descriptions of non-GAAP measures used historically continue to be consistent with their actual accounting practices for identifying, reviewing and approving non-GAAP adjustments.
An Active and Engaged Disclosure Committee Should Be Part of the Control Environment. An important lesson of the SEC’s order is the need for coordinated oversight of non-GAAP and other disclosures across a company’s various departments to promote a consistent and accurate disclosure control environment. An active and engaged disclosure committee should play a prominent role in reviewing and commenting on non-GAAP disclosures. The disclosure committee should also periodically review the disclosure controls and procedures with respect to non-GAAP disclosure to ensure they remain up-to-date, consistent with the company’s actual business practices, and accurate overall.
As John noted, the first article in the March-April issue of “The Corporate Counsel” newsletter is “Non-GAAP Financial Measures: The Pendulum Swings.” In my book, this is also required reading to prevent, to quote the article, non-GAAP “backsliding”!
In mid-April, the Supreme Court unanimously held in related cases that federal district courts have jurisdiction to address constitutional challenges to the SEC and the FTC’s administrative proceedings. Here’s an excerpt from Wachtell’s post on the CLS Blue Sky Blog addressing the implications of this decision:
The Court found in both cases that the claims were not “of the type” Congress intended to channel through the SEC’s and FTC’s statutory review schemes and so the district court could adjudicate such claims without awaiting a final agency decision. The Court reasoned that because the harm alleged was simply being subjected to the allegedly unconstitutional administrative proceeding itself, precluding district court jurisdiction could foreclose meaningful judicial review altogether. In addition, the constitutional claims were outside the agencies’ expertise and unrelated to the subject matter of the agency proceedings. As Justice Kagan put it, while the FTC may “know[] a good deal about competition policy,” it knows “nothing special about the separation of powers.”
This decision is the latest in a series by the Court that threaten to diminish the power of the administrative state at a time when agency heads have announced increasingly aggressive enforcement agendas. But while important, the Court’s decision is also a limited one. It addresses federal district courts’ jurisdiction to hear constitutional challenges to ongoing SEC and FTC administrative proceedings. Nothing in the Court’s opinion touches on judicial deference to agency expertise outside the context of constitutional challenges or on the ultimate merits of those challenges.
Companies operating within a regime of administrative regulation must weigh the types of challenges that best advance their business interests and strategies, and the manner in which to bring them. With the avenue opened by Friday’s decision, that calculus should now include a careful analysis of whether to launch a parallel constitutional challenge in federal district court alongside any more conventional challenge to agency action within the confines of an administrative proceeding itself.
ChatGPT and other generative AI has the potential to transform the way we live and work, and everywhere you look these days people are asking tough questions about AI. If you’re interested in the ethical and moral questions for which there may be no right answers, this Wall Street Journal article has food for thought and so did a South Park episode—partially written by ChatGPT!—where the characters use ChatGPT to argue their way out of getting in trouble for using it.
The philosophical side of things may be outside our wheelhouse (phew!), but there are a host of practical and legal issues with AI that companies need to be thinking about now. We’re posting memos and other materials in our “Artificial Intelligence” Practice Area addressing a myriad of topics like these:
– AI seems to be the latest regulatory hot topic and—like with privacy laws—companies need to be aware of an emerging patchwork of state regulation, which Jenner & Block addresses in this client alert, and the potential for federal legislation, highlighted by DLA Piper
– Legal risks with using AI for corporate purposes—including whether the use of AI may violate contractual obligations or privacy laws or infringe intellectual property rights—addressed by WilmerHale in this article on the top 10 legal and business risks of using chatbots
– Considerations for preparing a policy governing the use of AI, recommended by Debevoise in this article highlighting that many employees have started deploying it for work-related tasks
– The potential for generative AI to transform the legal industry, discussed by Mintz in this article
If regulatory, legal and business risks of AI don’t already pique your interest, know that AI is also on the SEC’s radar. Here’s an excerpt from Chair Gensler’s prepared testimony before the House Committee on Financial Services:
Artificial intelligence and predictive data analytics are transforming so much of our economy. Finance is no exception.
AI already is being used for call centers, account openings, compliance programs, trading algorithms, and sentiment analysis, among others. It’s also fueled a rapid change in the field of robo-advisers and brokerage apps. When the predictive data analytics and algorithms behind these apps are optimizing for investor interests, this can bring benefits in market access, efficiency, and returns.
As commenters to our request for comment on digital engagement practices noted, however, the use of predictive data analytics also can lead to potential conflicts. In particular, conflicts may arise to the extent that advisers or brokers are optimizing for their own interests as well as others.
Thus, I’ve asked staff to make recommendations for the Commission’s consideration for rule proposals regarding how best to address any of these potential conflicts.
I haven’t seen much AI-related disclosure—outside directly-involved tech companies—but I imagine it’s only a matter of time (and not much) before it’s a disclosure hot topic.
We’ve posted the transcript for our recent “Conduct of the Annual Meeting” webcast featuring Lauri Fischer, Senior Deputy General Counsel and Assistant Secretary at Grocery Outlet, Edward Greene, Managing Director at Georgeson, Carl Hagberg, Independent Inspector of Elections and Editor of The Shareholder Service Optimizer, and David Hamm, Vice President, Deputy General Counsel and Assistant Secretary at Summit Materials. Companies faced some unique challenges at their annual meetings this year, and our panelists discussed the latest developments, tips and tricks and some compelling stories.
Carl Hagberg shared his firsthand account of an annual meeting incident Liz previously blogged about, which he characterized as “the most carefully planned and executed disruptive event at an annual meeting ever,” and then provided this timely reminder about meeting security:
Hagberg: Meeting security is more important than ever before and please remember; security is for everybody. Companies and security officers often focus on management and the board. Yes, they’re going to be the main focus of any action and you need to focus on them intensively, but you also need to focus on the people in the audience. They should be able to clear the room in an orderly fashion. I’ve been at meetings where the fire alarm went off, one where the sprinkler system went off and one where the power went off. You need to have a script to tell people where the exits are and, “The meeting is over. Please exit quietly and carefully.” Be sure that your security measures and your script cover everybody there in the room.
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.
