The March-April issue of “The Corporate Counsel” newsletter is in the mail (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 – an option that many people are taking advantage of in the “remote work” environment. This issue includes the following articles:
– SEC Proposes Breathtaking Climate Disclosure Rules
– A Long Road to Regulations: The SEC’s Cybersecurity Disclosure Proposals
– Beneficial Ownership in the Spotlight: The SEC Proposes Much Needed Reforms
Dave & I also have been doing a series of “Deep Dive with Dave” podcasts addressing the topics we’ve covered in recent issues. We’ll be posting one for this issue soon. Be sure to check it out on our “Podcasts” page!
It can happen to any public company – an executive is having a one-on-one with an investor or analyst, and inadvertently discloses a tidbit of information that may be material nonpublic information. If it is, then Reg FD requires the company to promptly disclose that information to the public. But what internal procedures should companies follow in determining whether they have a Reg FD issue? That’s the topic of this Woodruff Sawyer blog, which lays out three steps that a company that finds itself in this situation should take:
1. Avoid making premature conclusions. Many times, potential Regulation FD issues are flagged by non-lawyers that were present at a meeting where the authorized speaker disclosed nonpublic information. In some cases, the issue may be flagged by the authorized speaker. Individuals may naturally jump to conclusions as to the character of disclosure. That should be avoided. Best practice for these individuals is to limit internal discussions and communications—particularly if they are in writing—regarding a potential Regulation FD disclosure issue to the particular facts and leave legal assessments to legal counsel.
2. Immediately contact legal counsel. A materiality determination will generally require, among other things, that counsel consult with other functions/departments within the company to assess whether the authorized speaker has in fact inadvertently disclosed material nonpublic information. This can take time—something the company doesn’t have much of. Remember, a company must publicly disclose material nonpublic information following an unintentional selective disclosure of that information before the later of (a) 24 hours or (b) the beginning of the next day’s trading on the New York Stock Exchange (NYSE). As a result, it is imperative that counsel have as much runway to assess the issue. If public disclosure is determined to be required, counsel will need to help to prepare that disclosure along with other internal stakeholders, which may be management, investor relations and finance.
3. Make certain that relevant internal stakeholders are involved, updated as to developments and made aware of the outcome. Ideally, a company will have already identified the team that should be involved in reviewing Regulation FD related issues before having to put up the Bat-Signal. At a minimum, that team should include in-house counsel, investor relations, and finance.
This third point is critical because if the disclosure results in stock price movements, the company may receive inquiries from analysts, investors, stock exchanges & the SEC. Since no single function will be on the receiving end of all of those inquiries, it’s important to involve all relevant internal stakeholders to ensure there are no information gaps.
After I posted this, a member reached out to us with the following comment, and it’s a good one: “Also, no one should trade until the situation is worked out. Insider trading while material information has been disclosed only selectively, creates additional issues for the traders, putative tipper(s) and the issuer.”
Twitter has been a great source of DealLawyers.com blogs this week, but the bird app also was recently involved in some litigation of interest to securities & capital markets lawyers. The 10b-5 Daily points out that last month, the 9th Circuit held that Twitter did not have a duty to update statements about its product development efforts. This excerpt summarizes the facts of the case and the Court’s decision:
In Weston Family Partnership LLP v. Twitter, 2022 WL 853252 (9th Cir. March 23, 2022), the plaintiffs alleged that Twitter had misled investors about problems with its Mobile App Promotion (MAP) product. In August 2019, Twitter announced that software bugs in the MAP product had caused the sharing of the cell phone location data of its users and that it had “fixed these issues.” Several months later, the company disclosed that software bugs continued to exist and reported a $25 million revenue shortfall.
The district court dismissed the claims. On appeal, the Ninth Circuit found that “fixed these issues” referred to no longer sharing the cell phone location data, not the software bugs. Moreover, Twitter had no duty to update investors about the progress of its MAP product and the plaintiffs had not plausibly alleged that the software bugs had materialized and impacted revenue prior to August 2019.
The Court’s language on the duty to update is likely to find its way into countless future briefs:
Plaintiffs suggest that Twitter—when faced with a setback in dealing with software bugs plaguing its MAP program—had a legal duty to disclose it to the investing public. Not so. While society may have become accustomed to being instantly in the loop about the latest news (thanks in part to Twitter), our securities laws do not impose a similar requirement. Section 10(b) and Rule 10b-5 “do not create an affirmative duty to disclose any and all material information.” Matrixx, 563 U.S. at 44.
Put another way, companies do not have an obligation to offer an instantaneous update of every internal development, especially when it involves the oft-tortuous path of product development. See Vantive, 283 F.3d at 1085 (“If the challenged statement is not false or misleading, it does not become actionable merely because it is incomplete.”). Indeed, to do so would inject instability into the securities market, as stocks may wildly gyrate based on even fleeting developments. A company must disclose a negative internal development only if its omission would make other statements materially misleading.
Stan Keller’s “Integration of Public and Private Offerings” outline has long been the go-to resource for lawyers trying to work their way through integration issues in securities transactions. Stan recently updated his outline and was kind enough to provide a copy to us, which we’ve posted in our “Integration” Practice Area. If you’re not familiar with it – well, you must be new here!
The outline focuses on SEC rules and interpretations that relate to the integration of private and public offerings and how they affect the capital formation process. Importantly, the outline also reviews the SEC’s approach to integration of offerings generally as it has evolved to date, including the major changes that became effective in March 2021. It remains a terrific resource and one you should definitely keep close at hand.
On April 14, 2022, a SPAC called Alberton Acquisition Corporation filed a Form 8-K announcing that its de-SPAC target had decided to terminate its merger agreement with the Alberton because the deal would not be completed before its April 26, 2022 “drop dead” date. The 8-K includes a somewhat elliptical reference to the fact that Alberton’s Form S-4 registration statement for the transaction hadn’t been declared effective by the SEC as of April 13, 2022. That announcement prompted an extraordinary statement from Commissioner Hester Peirce criticizing the SEC for its inaction concerning that registration statement.
Alberton’s reference to the status of the registration statement may have been elliptical, but Commissioner Peirce’s was very direct. She said that the SEC failed to act on Alberton’s acceleration request, and that its inaction had everything to do with the company’s status as a SPAC:
Commission inaction on a request for acceleration of the effective date of a registration statement is highly unusual. Rule 461(b) of the Securities Act of 1933 explains the statutory considerations for the Commission when determining to accelerate the effective date of a registration statement, lists specific situations in which the Commission “may refuse to accelerate the effective date,” and states that “it is the general policy of the Commission, upon request, . . . to permit acceleration of the effective date of the registration statement as soon as possible after the filing of appropriate amendments, if any.” Here, no Commission action has been taken, so there is no obligation to explain why the registration statement was not declared effective.
The failure to take an otherwise routine step makes sense only in the larger context of the Commission’s newfound hostility to SPAC capital formation. The SPAC completed its IPO in October 2018 with the intent to complete a business combination within 18 months. SPAC shareholders approved two extensions of that timeline prior to a merger agreement being entered into in October 2020 with SolarMax, a solar energy company with operations in China. SPAC shareholders subsequently approved two further extensions of the timeline within which to complete the business combination, resulting in the current deadline of April 26, 2022. Meanwhile, the SPAC filed eight amendments to its registration statement relating to the business combination since October 2020, including the most recent April 4, 2022 amendment.
Commissioner Peirce goes on to recount other developments on the SPAC front over the course of the past 18 months, including “most significantly,” the SEC’s decision last month to propose “sweeping rules pertaining to SPACs, including a proposed non-exclusive safe harbor under the Investment Company Act of 1940.” Among other things, that safe harbor would require a SPAC to enter into a de-SPAC agreement within 18 months of their IPO & complete the deal within 24 months following the IPO.
Alberton has been a SPAC for more than 24 months, and Commissioner Peirce speculated that, because the failure to act on the acceleration request came less than a month after the release of the SPAC proposal, “this SPAC might be a victim of the parameters of a non-exclusive safe harbor that have not yet been adopted.” Her critique also hinted at potential due process issues associated with the SEC’s action, pointing out that “[w]ithout affording some notice, the Commission cannot turn on a dime and start treating SPACs that do not meet an arbitrarily determined timeline as investment companies.” She concludes her statement by questioning the SEC’s good faith with respect to this matter:
It is not a good look for the Commission to run a SPAC through the gauntlet of addressing disclosure comments only to say, “Oh, and by the way, now you are too old to be anything other than an investment company.” We must always engage registrants in the same good faith that we expect of them. A failure to do so would undermine the credibility of this agency.
Unfortunately, it’s difficult to assess the validity of Commissioner Peirce’s allegations. The Staff comment letters and company responses haven’t been made public yet, and with eight amendments (!) to the company’s Form S-4, it’s fair to say that this deal had a lot of hair on it, regardless of the SEC’s hostility toward SPACs. Furthermore, eleventh hour comments that throw the timing of an offering off-course aren’t unheard of outside of the SPAC realm either. Nevertheless, this situation certainly raises a lot of questions about how future SPAC filings will – or will not – be processed.
In response to sanctions imposed on Russia for its unprovoked invasion of Ukraine, the Putin regime has promised to take countermeasures in an effort to make foreign investors feel some pain. This King & Spalding memo says that investors harmed by these actions may have recourse against Russia under various international treaties, assuming that a diplomatic resolution for addressing those claims cannot be achieved. This excerpt describes Russia’s treaty obligations that may give rise to claims by foreign investors:
There are currently 62 bilateral investment treaties (“BITs”) in force between Russia and key jurisdictions such as Canada, the Netherlands, Singapore, Switzerland, Turkey, the United Arab Emirates, and the United Kingdom, but not the United States. Russia is also party to several multilateral treaties that provide investment protection guarantees, most notably the Energy Charter Treaty (the “ECT”). Although Russia never ratified the ECT and sought to terminate its provisional application in 2009, the ECT contains a 20 year “survival” mechanism. This arguably means that Russia will remain bound by investment protection guarantees in the ECT until 2029.
These investment treaties provide investors and their investments in Russia with several protections, although the scope and nature of those protections will vary depending on the particular treaty, and allow affected investors to bring legal claims directly against Russia for violations of these guaranteed protections.
By now, you’re probably saying, “that’s swell, but how are investors going to collect any damage awards they receive?” The memo says that there may be way to do that:
In the likely event that Russia fails to voluntarily pay an adverse arbitral award, a foreign investor will need to enforce its award against Russian state-owned assets located outside Russia. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the “New York Convention”) is a multilateral treaty that requires its 169 Contracting States (which include Russia) to recognize and enforce arbitration awards rendered in other Contracting States, subject to very limited exceptions.
The memo acknowledges that enforcement will pose significant challenges, but because international sanctions regimes have frozen many billions of dollars in Russian assets, investors that can identify frozen assets belonging to certain Russian state-owned entities may be able to enforce arbitral awards against those assets.
Join us tomorrow at 2 pm eastern for the webcast – “The (Former) Corp Fin Staff Forum” – to hear former senior SEC Staff members Sonia Barros of Sidley Austin, Meredith Cross of WilmerHale LLP, Tom Kim of Gibson Dunn & Crutcher, LLP, Keir Gumbs, Chief Legal Officer, Broadridge Financial Solutions, and Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net discuss recent rulemaking & other SEC initiatives and provide practical guidance about what you should be doing as a result.
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of TheCorporateCounsel.net are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, subscribe now by emailing sales@ccrcorp.com – or call us at 800.737.1271.
Eagle-eyed members may have noticed that we recently added an “Artificial Intelligence” Practice Area to the site. Shortly afterwards, Debevoise published this 5-page memo – which does a great job of explaining why you’ll need to get your arms around AI if you’re advising boards. Here’s the intro:
As more businesses adopt artificial intelligence (AI), directors on many corporate boards are starting to consider their oversight obligations. Part of this interest is related to directors’ increasing focus on Environmental, Social and Governance (ESG) issues. There is a growing recognition that, for all its promise, AI can present serious risks to society, including invasion of privacy, carbon emissions and perpetuation of discrimination. But there is also a more traditional basis for the recent interest of corporate directors in AI: as algorithmic decision-making becomes part of many core business functions, it creates the kind of enterprise risks to which boards need to pay attention.
The memo goes on to outline current regulatory considerations and how Caremark claims could play out in this area. Especially at companies where use of AI is significant and could present an enterprise risk, the Debevoise team suggests that boards consider:
1. Having AI as a periodic board agenda item – and evaluate whether it’s a topic for the full board or a specific committee
2. Staying aware of the most critical AI systems the company employs – along with risks & steps taken to mitigate risks
3. Getting periodic updates on resources devoted to AI development & operations, along with regulatory compliance and risk mitigation
4. Assigning AI responsibility to a particular management position or committee
5. Directing management-level AI compliance and reporting structures to facilitate board oversight – including procedures for responding to material incidents, whistleblower complaints, and managing vendor risks for critical resources
6. Board briefings on material AI incidents
7. Documenting AI oversight activities and management’s compliance efforts in board minutes and supporting materials
Our new Practice Area covers regulatory developments and guidance on board oversight and AI risks. To get access if you’re not already a member, you can sign up online, email sales@ccrcorp.com or call 1-800-737-1271.
Direct listings attracted a fair amount of excitement back in 2019, which as you might recall was before meme-stocks and SPACs sucked all of the air out of the room. A recent Fenwick memo checks in on whether they’ve become the IPO alternative that some predicted. The answer: not at this time. Ran Ben-Tzur notes:
While direct listings continue to be an attractive option for certain companies, the ‘death’ of the traditional IPO that was predicted just a couple years ago has not materialized, with 2021 showing that IPOs still remain a much more popular way for companies to go public.
The memo explains that direct listings have stayed niche because they work best for companies that already have proven size, profitability and liquidity – and also because of the high standard that a company needs to be able to conduct a simultaneous capital raise.
It probably doesn’t help that the SEC also recently rejected Nasdaq’s proposal that would have allowed more flexibility for the pricing range in these deals. John had previously blogged about that proposal back in January.
A year ago, there were signs that Congress might remove a funding roadblock that has prevented the SEC from regulating political spending disclosure. That generosity was fleeting, as Cydney Posner explains in the intro to a recent blog:
I have to admit I was surprised to read that, in the new $1.5 trillion budget bill, Congress has once again prohibited the SEC from using any funds for political spending disclosure regulation. But there it is—Section 633—in black and white: “None of the funds made available by this Act shall be used by the Securities and Exchange Commission to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.”
That means that, for now anyway, private ordering—through shareholder proposals at individual companies and other forms of stakeholder pressure, including humiliation—will continue to be the pressure point for disclosure of corporate political contributions. Those proposals have grown increasingly successful in the last couple of years. And, notably, it appears that the focus of many proposals has shifted recently, with more emphasis on apparent conflicts between stated company policies and values and the beneficiaries of those political contributions.
As late as December last year, it looked like political spending disclosure regulation could well be on the horizon. In questioning by the Senate Committee on Banking, Housing and Urban Affairs in connection with his nomination as SEC Chair, Gary Gensler was asked by both sides about political spending disclosure. Gensler replied that his position on the issue would be grounded in economic analysis and the courts’ views of materiality as the information reasonable investors wanted to see as part of the total mix of information. Gensler added that he considered the 80 shareholder proposals submitted last year on the topic and the 40% vote in favor as a strong indicator. In light of that level of investor interest, political spending disclosure was something he thought the SEC should consider.
Cydney goes on to detail recent shareholder proposal activity on this topic and predicts that private ordering will continue full steam ahead. We’ve been writing about these developments on our Proxy Season Blog – if you’re a member, subscribe to that blog to stay in-the-know.
Programming Note: Since tomorrow’s Good Friday and the first night of Passover, this blog will take the day off. Happy Easter and Happy Passover to those who celebrate the holidays, and Ramadan Mubarak to those observing the holy month. Enjoy the weekend and we’ll see you back here on Monday!
