The latest issue of The Corporate Counsel has been sent to the printer. It is also available now online to members of The CorporateCounsel.net who subscribe to the electronic format. The issue includes the following articles:
– SEC Adopts Climate Disclosure Rules – What Should You Do Now?
– The Presumptive Underwriter Doctrine Rears Its Ugly Head
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I am sure that, at this point, your level of anticipation is off the charts for the rollout the new T+1 settlement timeframe, which will be implemented over the Memorial Day holiday weekend across securities markets. As of this morning, we are just 40 days away from the transition to T+1, and certainly nothing focuses the mind like an impending deadline. As questions inevitably arise regarding the transition to T+1, the Securities Industry and Financial Markets Association (SIFMA) has provided comprehensive resources for market participants.
In addition to a handy countdown clock for the U.S. and Canadian transition to T+1, SIFMA has posted the T+1 Securities Settlement Industry Implementation Playbook, which “outlines a detailed approach to identifying the impacts, implementation activities, implementation timelines, dependencies, and risk impacts, that market participants should consider in order to prepare for the impending transition to a shortened settlement cycle.” On April 8, 2024, SIFMA, ICI, DTCC and Deloitte hosted a virtual briefing to discuss what financial services organizations are focusing on between now and the upcoming deadlines, a replay of which is available on SIFMA’s website. I encourage you to check out the resources that SIFMA has made available and carefully consider the implications of the T+1 transition in anticipation of the end-of-May rollout.
The SEC’s Rule 10b5-1 and insider trading disclosure rulemaking from back in December 2022 included a long transition period for the periodic disclosures concerning insider trading policies and procedures and option grant timing practices, with much of the focus being on December 31 year-end companies that do not have to comply until their filings made in 2025. For companies (other than smaller reporting companies) with a fiscal year ending on or after March 31, 2024, the new requirements will be in effect for their upcoming annual report and proxy statement filings, so it is time to pay attention to what needs to be disclosed when.
New paragraph (x) of Item 402 of Regulation S-K is one of the disclosure items that March 31 companies will need to pay attention to now that the transition period has run. Item 402(x) requires disclosure of a company’s policies and practices on the timing of awards of options, stock appreciation rights and similar instruments with option-like features, as well as certain tabular disclosure of awards of options, SARs and instruments with option-like features to named executive officers that occur close in time to the company’s disclosure of material nonpublic information. The disclosure required by Item 402(x) of Regulation S-K must be tagged using Inline XBRL. Foreign private issuers are not required to provide this disclosure.
Companies will also need to comply with Item 408(b) of Regulation S-K, which requires companies to disclose whether they have adopted insider trading policies and procedures governing the purchase, sale and other dispositions of their securities by directors, officers and employees, or the issuer itself, that are reasonably designed to promote compliance with insider trading laws, rules and regulations, and any listing standards applicable to the issuer. If an issuer has not adopted such insider trading policies and procedures, it must explain why it has not done so. Domestic companies must provide this disclosure in both annual reports on Form 10-K pursuant and in proxy and information statements, while foreign private issuers will be required to provide the disclosure pursuant to Item 16J in Form 20-F. This disclosure also must be tagged using Inline XBRL.
Finally, companies with a March 31 fiscal year-end will need to file, as an exhibit to their annual report on Form 10-K or Form 20-F, any insider trading policies and procedures, or amendments thereto, that are the subject of the disclosure required by Item 408(b) of Regulation S-K. This exhibit is not required to be tagged using Inline XBRL.
Smaller reporting companies get some extra time to comply with these new disclosure requirements. They must begin complying in filings with respect the first full fiscal period that begins on or after October 1, 2023, so these disclosures will be required in annual reports and proxy statements for fiscal years ending on or after September 30, 2024.
We have posted the transcript for our recent webcast, “The SEC’s Climate Disclosure Rules: Preparing for the New Regime,” during which I was joined by J. T. Ho, Partner, Orrick, Herrington & Sutcliffe LLP, Rose Pierson, Assistant Secretary and Senior Counsel, Chevron and Kristina Wyatt, Deputy General Counsel and Chief Sustainability Officer, Persefoni for a discussion of the SEC’s new climate disclosure rules. The webcast covered the following topics:
– Overview of the SEC’s Final Rules and Key Changes from the Original Proposal
– Developing and Implementing an Effective Compliance Plan
– Navigating Multiple Climate Reporting Regimes
– Legal Challenges to the SEC’s Rules
This was a great webcast to be a part of – we covered a lot of ground and the panelists provided insights on a number of the key implementation challenges that companies will face with these new rules.
On Friday, the Supreme Court issued its decision in Macquarie Infrastructure Corp. v. Moab Partners, L.P., a case from the Second Circuit addressing the ability to rely on a failure to disclose certain information in accordance with the requirements of Item 303 of Regulation S-K as a basis to state a securities fraud claim under SEC Rule 10b-5. A unanimous Supreme Court held that “pure omissions” are not actionable under Rule 10b–5(b). The opinion, authored by Justice Sotomayor, states:
Securities and Exchange Commission (SEC) Rule 10b–5(b) makes it unlawful to omit material facts in connection with buying or selling securities when that omission renders “statements made” misleading. Separately, Item 303 of SEC Regulation S–K requires companies to disclose certain information in periodic filings with the SEC. The question in this case is whether the failure to disclose information required by Item 303 can support a private action under Rule 10b–5(b), even if the failure does not render any “statements made” misleading. The Court holds that it cannot. Pure omissions are not actionable under Rule 10b–5(b).
As a result of the Supreme Court’s decision, the judgment of the Court of Appeals for the Second Circuit is vacated, and the case is remanded for further proceedings consistent with the Supreme Court’s opinion.
The Court explained, “A pure omission occurs when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.” By contrast, a half-truth occurs when a speaker says something, but “state[s] the truth only so far as it goes, while omitting critical qualifying information.” The Court held that Rule 10b-5(b) prohibits half-truths but not pure omissions, noting that the text of Rule 10b5-1(b) prohibits omitting information from a public disclosure that is “necessary in order to make the statements made … not misleading.” Liability under that provision turns on there being “statements made” that were misleading. While other provisions of the securities laws, such as Section 11 of the Securities Act, prohibit pure omissions, neither Rule 10b-5(b) nor Section 10(b) contains this express prohibition. The Court made clear that it was not opining on other issues not presented to it, such as “what constitutes ‘statements made’” and “when a statement is misleading as a half-truth.”
The Forum is a unique event where members of the public and private sectors gather to provide feedback to improve capital-raising policy. The event will feature appearances by each of the Commissioners and an exciting lineup of speakers with fresh perspectives on capital raising. Sessions will focus on the following topics:
– Tuesday, April 16: Amplifying Early-Stage Stories
– Wednesday, April 17: Opening the Dialogue on Investing
– Thursday, April 18: Catching up with Small Caps
At the end of each day’s session, registered participants will have the opportunity to prioritize capital-raising policy recommendations to the Commission and Congress. After the event, a report with the recommendations will be delivered to Congress.
Participants must register for the Forum and will be able to attend the virtual sessions, prioritize policy recommendations and ask questions. The SEC also accepted policy recommendations through last Friday.
As Meredith recently noted on the Advisors’ Blog on CompensationStandards.com, the 2024 update to Skadden’s Compensation Committee Handbook is now available — now in its 10th edition, it reflects key developments since last spring, including updates for the clawback rules and developments in pay-versus-performance disclosures. In the discussion of clawbacks, it briefly touches on the interplay with other legal requirements, including SOX and state laws:
Committees should keep in mind that certain states, such as California, have laws that generally prohibit the recovery of wages that have already been paid. While the Dodd-Frank clawback rules are currently expected to preempt conflicting state law, litigation activity may be on the horizon to definitively confirm this.
CEOs and chief financial officers (CFOs) remain subject to the clawback provisions of the Sarbanes-Oxley Act of 2002 (SOX), which provide that if a company is required to prepare an accounting restatement because of “misconduct,” the CEO and CFO are required to reimburse the company for any incentive or equity-based compensation and profits from selling company securities received during the year following issuance of the inaccurate financial statements. To the extent that a Dodd-Frank Clawback Policy and SOX cover the same recoverable compensation, the CEO or CFO would not be subject to duplicative reimbursement. Recovery under the Dodd-Frank Clawback Policy will not preclude recovery under SOX to the extent any applicable amounts have not been reimbursed to the issuer.
ExxonMobil filed its definitive proxy statement yesterday, and – Holy Smokes! – it’s quite a read. The company devotes three full pages to a scorching diatribe against the current shareholder proposal process and those proponents and representatives whom it believes abuse that process. Here’s a taste of what ExxonMobil had to say:
The proposal process is being abused by those who treat shareholder democracy as a venue for activism and counter-activism, from self-styled “green” or “progressive” groups to the “anti-ESG” organizations that oppose them. In recent years, ExxonMobil has seen proposals that target Board members for their public statements, cherry pick key performance indicators to be alternately used or not used by the Company, redefine risk based on each proponent’s narrow view of the energy transition, and demand dozens of often contradictory actions – all driven more by ideology than shareholder value. When these proposals come to a vote, the low shareholder support they receive makes it clear that they do not add value, except perhaps to the proponents or their representatives in driving their marketing and fundraising efforts while they advance their individual agendas.
Over the past two years, proposals have been submitted to ExxonMobil seeking more than 19 new reports – including 13 such proposals that are or were on topics the Company already covers in its reporting. Many of these prescribe metrics and approaches that are inconsistent with the realities of the Company and the industry; advance unproven and poorly defined notions of materiality; or seek reports based on narrow, remote, or unlikely future scenarios to advance a specific agenda, not to enhance shareholder value.
Many of the proponents and representatives work with each other or other activist organizations, and hijack the shareholder proposal process to advance their own agenda, which often conflicts with growing investors’ value.
ExxonMobil goes on to identify the various proponents and representatives by name and highlights their efforts to collaborate on shareholder proposals. The company concludes this part of its smackdown with the following statement: “We are increasingly seeing a number of proposals each year, backed by the same activist organizations, submitted by different named shareholders. We believe that this is a misuse of the shareholder proposal process, which is designed to allow a shareholder to submit a single proposal each year.”
The company’s lawsuit seeking to exclude proposals submitted by Arjuna Capital and Follow This – which also gets a fairly lengthy mention in this part of the proxy – already signaled that ExxonMobil was prepared to play hardball with shareholder proponents this season, and its proxy disclosure makes it clear that it isn’t backing off.
Whether ExxonMobil’s strategy is a good one is an open question, but as someone who dealt with a few very frustrating shareholder proposals and proponents in a prior life, I’d be willing to bet that drafting this disclosure must have been a truly cathartic experience for everyone involved! (Thanks to Rhonda Brauer for tipping us off to this filing).
Remember the Barclays PLC over-issuance debacle from a few years ago? Unfortunately, the SDNY’s recent decision in In re Barclays PLC Sec. Litig., (SDNY 2/24) refusing to dismiss Rule 10b-5 claims against the company indicates that the repercussions from that incident continue to unfold. In that decision, the Court concluded that the plaintiff had adequately alleged that the company’s failure to appropriately track the amount of securities it had available under its shelf registration statement demonstrated that statements it made about its internal controls were misleading. This excerpt from Shearman’s blog on the case explains the Court’s reasoning:
The Court first considered the company’s general statements relating to internal controls before the alleged over-issuances were revealed, including that the company was “committed to operating within a strong system of internal control” and had “frameworks, policies and standards” that enabled the company “to meet regulators’ expectations relating to internal control and assurance.” The Court rejected defendants’ argument that these statements were too “simple and generic” to be actionable, explaining that, according to the complaint’s allegations, the company allegedly did not have any control mechanism in place to prevent the over-issuance of securities and the supposed omission of this lack of a control system was adequately alleged to be material.
The Court stressed that, in its view, the allegations were not merely that the company’s systems underperformed; rather, the allegations were that no system for tracking the company’s securities issuances existed at all. The Court further held that because it concluded that these statements were actionable, plaintiff could also pursue claims challenging the company’s Exchange Act compliance certifications.
The Court also found that the plaintiffs had adequately alleged that the company was reckless in failing to implement controls to appropriately track shelf issuances after the company lost its WKSI status. In reaching that conclusion, the Court noted the magnitude of the over-issuances and the fact that they had been uncovered through a simple inquiry from a low-level employee to the legal department.
With so many different jurisdictions imposing climate disclosure and reporting obligations, it’s very hard to keep track of what must be disclosed and to whom it must be disclosed. That’s why I think those of you who are struggling to deal with the brave new world of multiple climate disclosure regimes will find this Freshfields memo to be a helpful resource.
The memo includes a chart comparing the requirements under the SEC’s final rules, the ISSB standards, the EU’s CSRD & ESRS rules, and California’s SB 253 and SB 261 legislation. That chart is accompanied by a narrative discussion highlighting some of the differences between the regimes. This excerpt discusses the differences in the way each of these regulatory schemes approaches disclosures about transition plans and targets and goals:
Under the Final Rules, companies are only required to disclose climate-related targets that have materially affected or are reasonably likely to materially affect the company’s business, results of operations or financial condition as well as information necessary to understand the material impact or reasonably likely material impact of the target or goals and provide annual updates on actions taken to achieve such targets or goals.
Companies subject to the CSRD are required to disclose their climate-related targets and transition plans, if any, to ensure their business model is compatible with, among other things, the objectives of limiting global warming to 1.5°C in line with the Paris Agreement. The California Rules’ broader standard only requires disclosure of a company’s measures adopted to reduce and adapt to climate-related financial risk disclosed.
The memo says that companies developing transition plans and targets and goals need to consider the disclosure implications under each of these regimes and consider the potential liability, reputational and other risks arising out of the need to comply with differing disclosure requirements.