Starboard’s latest effort to push Murdoch-family-controlled News Corp to eliminate its dual-class share structure has been heavily covered in the news. The gist is that Starboard sent a letter to company shareholders and issued a related press release informing shareholders of Starboard’s shareholder proposal for the 2024 annual meeting. The proposal calls for the Board to collapse the company’s dual-class share structure. But that’s not the interesting part! Here are some things that make this situation unique:
– News Corp is widely described as “controlled” by the the Murdoch family. Really, the family’s stake is approximately 14% and it controls 41% of the vote. It may be an uphill battle, but Starboard says “there is a path to achieve majority support.” In fact, a similar 2015 proposal was supported by 90% of non-Murdoch shareholders, representing 49.5% of the vote.
– Starboard’s letter says it plans to file its own proxy statement. Why would Starboard decide to solicit proxies under Rule 14a-4 instead of seeking to include the proposal in the company’s proxy under Rule 14a-8 (especially when they’re not trying to submit multiple proposals)? This article from The Activist Investor speculates:
Starboard might have missed the 14a-8 proposal deadline, which was June 6. Perhaps it decided to submit a proposal only a few weeks ago. It could submit a 14a-4 proposal between July 18 and August 17.
Starboard avoids the hassles of 14a-8 proposals, including getting through the SEC no-action process.
If Starboard solicits proxies itself, then it alone knows how a possibly significant percentage of the shareholder base votes. It will have the proxies, and NWSA won’t. … Starboard may simply force the company to negotiate, somehow, over demands to eliminate dual-class shares, or perhaps other unknown demands.
Since the rule amendments for universal proxy cards, a proponent may include the company’s director slate on its own proxy card along with its proposal(s). That can make it more likely that shareholders return the proponent’s proxy card, and if enough do, the company may have less visibility in tracking and counting votes. The Activist Investor discussed this rule change and strategy in greater detail in a follow-up post.
This is one of the new activist approaches that our panelists will discuss at our 2024 Proxy Disclosure & Executive Compensation Conferences on October 14-15 in San Francisco during our “14a-8 & Shareholder Proposals: The Latest Developments” panel consisting of Davis Polk’s Ning Chiu, Weil’s Howard Dicker and Cooley’s Brad Goldberg. Peruse our agenda to see what else our expert practitioners will cover. You can register here for in-person or virtual attendance.
It’s not surprising that the FTX fiasco resulted in some charges against its auditor. But I noticed that the announcement also included the settlement of previous charges against Prager Metis for violating auditor independence rules.
The SEC’s complaint alleged that, between approximately December 2017 and October 2020, the Prager Entities improperly included indemnification provisions in engagement letters for more than 200 audits, reviews, and exams and, as a result, were not independent from their clients, as required under the federal securities laws.
The final judgments provide for permanent injunctions, combined civil penalties of $1 million, and combined disgorgement with prejudgment interest of $205,000. The Prager Entities also agreed to be censured. The settlement is subject to court approval.
This week, the PCAOB released a Spotlight on auditor independence — “an area of common deficiencies year after year” — highlighting recent staff observations. This follows May 2023 enhancements to audit inspection reports, which now include a section on auditor independence as part of the PCAOB’s transparency initiative. The data shows that independence-related comments increased to 14% (as a percentage of total comments) compared to 9% in 2022 and 7% in 2021. The most common issue in all three years was audit committee pre-approval requirements. These deficiencies consisted of:
– Lack of evidence that the necessary audit committee pre-approval had occurred prior to the audit firm commencing audit, non-audit and/or tax services
– Instances where the auditor did not describe in writing to the potential client’s audit committee the scope of any non-audit services provided that may bear on independence prior to its initial engagement
– Instances where the auditor did not describe in writing any non-audit services provided that may bear on independence annually to the client’s audit committee or where annual communications failed to describe share ownership (and subsequent sale) by a covered person or inaccurately presented professional standards
The end of the report lists audit committee considerations. Here are two related reminders:
– Independence is a shared responsibility between the entity under audit, its audit committee, and its auditor. It is important for the company to have policies and procedures to proactively alert auditors to proposed or pending merger and acquisition activity that could have an impact on auditor independence.
– If the audit committee pre-approves services using pre-approval policies and procedures, the audit committee should consider whether the pre-approval policies and procedures are sufficiently detailed as to the particular services to be provided so that the audit committee can make a well-reasoned assessment of the impact of the service on the auditor’s independence.
As Dave shared over the summer, Corp Fin Staff is reviewing and commenting on Item 1.05 disclosures in real-time. We’d already seen some letters pop up. But hat tip to Orrick’s Bobby Bee for pointing out this exchange regarding AT&T’s July 8-K, which is far more interesting than the first Item 1.05 comment letter. Here are some things to note:
First, the 8-K confirms some rumors about the delay provisions being used. It discloses that the DOJ determined a delay in public disclosure was warranted on May 9 and again on June 5. The SEC’s comment letter says nothing about this delay or the related disclosure.
Second, the 8-K says the incident “has not had a material impact on AT&T’s operations, and AT&T does not believe that this incident is reasonably likely to materially impact AT&T’s financial condition or results of operations.” As we know, the SEC has indicated that disclosures about immaterial incidents should be made under another item, such as 8.01, to avoid investor confusion. So, not surprisingly, the Corp Fin Staff’s only comment is to clarify whether the incident is material.
The response letter takes the following position: “[T]he question of whether an incident is ‘material’ for purposes of 1.05(a) of Form 8-K is distinct from the question of whether an incident is likely to have a ‘material impact’ on the registrant. … They are not the same concept: ‘material’ is broader than ‘material impact,’ and the definition’s focus is on investors and their viewpoints.”
The Staff stopped commenting after the response, but the “review complete” letter is longer than usual, saying “our decision not to issue additional comments should not be interpreted to mean that the Commission staff or the Commission either agree or disagree with, or are opining on the legality of, your disclosure or responses, conclusions, or positions you have taken.” The Staff points to the company’s conclusion that information about the incident would significantly alter the total mix of information made available due to “reputational and customer perception risks”:
Item 1.05’s inclusion of “financial condition and results of operations” is not exclusive; companies should consider qualitative factors alongside quantitative factors. … It appears inconsistent to conclude that an incident is material because of ‘reputational and customer perception risks associated with the incident’ but that the incident has not had, and is not reasonably likely to have, any material impacts on the company, including with respect to the company’s reputation and customer perception.
For anyone who joined Friday’s “Dialogue with the Director” at the ABA Business Law Section Fall Meeting, this sheds some light on a seemingly cryptic comment by Corp Fin Director Erik Gerding that “there seems to be a view” in the market that an incident could be material but there could be no material impacts, and reiterating that you have to consider qualitative impacts. Now I get it!
In early September, SEC Commissioner Mark Uyeda spoke at the Korea Blockchain Week in Seoul, South Korea. According to a recent CoinDesk article, he suggested at the event that the SEC should create a registration statement form tailored to digital assets.
The agency’s current form, the primary application companies must fill out to register securities in the U.S., does not do justice to digital assets and other unusual financial products, Uyeda said. The regulator has not done enough for digital asset products looking to register in the country, he said. … Uyeda noted that the regulator can work with crypto companies to figure out what parts should be added or removed from the present version.
When asked about crypto during the “Dialogue with the Director” at the ABA Business Law Section Fall Meeting, Corp Fin Director Erk Gerding noted that he didn’t have any further information on Commissioner Uyeda’s comments. But, noting that the largely principles-based nature of existing forms and rules work for issuers and instruments across many industries, including crypto asset securities, he suggested that anyone considering registering a particular asset with the SEC should talk to the Staff or take the plunge and submit a filing. He said the Staff will have crypto experts in the Division work through questions with advisors and issuers on how particular rules and disclosure items apply in their particular circumstances.
Speaking of crypto and the divided Commission, FOX Business journalist Eleanor Terrett shared Monday on X that the full five-member Commission is preparing to testify in front of the House Financial Services Committee next Tuesday, which she says will be the first time all the Commissioners have testified together since 2019. Chair Gensler will testify the following day, and her follow up post reports the Committee will hold a hearing called, ‘Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets.’
Here’s something I shared on Monday on DealLawyers.com:
During the ABA Business Law Section’s “Dialogue with the Director” last Friday, Corp Fin Director Erik Gerding noted that Corp Fin staff has noticed a slight uptick in SPAC IPOs and shared some helpful thoughts on the disclosure review process now that the SPAC disclosure rules are effective. I’ve tried to paraphrase some of the key takeaways below (subject to the SEC’s standard disclaimer — and my own disclaimer that these are summaries based on my notes from Director Gerding’s oral comments):
– The SEC expects DRS submissions to be substantially complete when submitted. Nothing new; just a reminder.
– The filings complying with the new rules are lengthy, which may impact disclosure review timing. Plan accordingly.
– Some filers have elected to voluntarily comply with the new rules even if they don’t apply (for example, when the filing could be governed by the old rules because the filer had submitted filings prior to the effective date of the new rules on July 1). In that case, the Disclosure Review Program staff will treat the filing as if the new rules apply and comment accordingly.
– When dealing with a “SPAC on top” structure, Corp Fin staff may permit the de-SPAC filing to be submitted as a DRS by relying on the co-registrant’s DRS eligibility where the rules require a co-registrant. This is because the de-SPAC is the functional equivalent of the target’s IPO.
Director Gerding also acknowledged that technical EDGAR issues continue with respect to co-registrants, but Monday afternoon the SEC announced the adoption of updates to Volume II of the Filer Manual to reflect, among other things, that EDGAR will be updated to permit SPACs to identify target companies in a de-SPAC as co-registrants on Form DRS and DRS/A. It looks like EDGAR Release 24.3 was rolled out that day with the announcement.
At the same time, the SEC updated these FAQs on Voluntary Submission of Draft Registration Statements to revise old question 19 on de-SPACs & co-registrant status, which now reads:
(19) Question:
If a registrant uses the confidential submission process to submit a draft registration statement in connection with a de-SPAC transaction, when should it include any co-registrant’s CIK and related submission information in the EDGAR Filing Interface?
Answer:
In EDGAR Release 24.3, EDGAR was enhanced to allow co-registrants on draft registration statement submissions. See Section 7.2.1 Accessing the EDGARLink Online Submission of the EDGAR Filer Manual. The primary registrant must include the co-registrant’s CIK and related submission information in EDGAR when it submits the draft registration statement. See Section 7.3.3.1 Entering Submission Information of the EDGAR Filer Manual. The draft registration statement must also contain the information required by the applicable registration statement form, including required information about the target company. Co-registrants do not need to separately submit the draft registration statements or related correspondence in EDGAR.
Last week, the SEC announced settled enforcement proceedings arising out of allegedly misleading IPO disclosures about a biotechnology company’s overall market potential, revenue prospects, and customer pipeline for the company’s only commercially available product. Without admitting or denying the SEC’s findings, the company consented to an order to cease and desist from future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act (which do not require proof of scienter) and agreed to pay a $30 million civil penalty to resolve the charges. Here’s an excerpt from the SEC’s press release:
According to the SEC’s order, Zymergen claimed that it had a $1 billion electronics display market opportunity for Hyaline, but the estimate was based on flawed and unreasonable assumptions that included product markets that were poor fits for Hyaline’s technical characteristics and unsupported premium pricing.
The SEC’s order also finds that Zymergen provided misleading revenue forecasts to research analysts that far exceeded internal estimates.
Additionally, the order finds that Zymergen misled investors during its first public earnings call by misrepresenting the status of Hyaline’s customer pipeline while omitting significant technical and commercial problems facing the product.
As hinted at above, the order takes issue with inconsistencies between the public statements and projections used and concerns raised internally. The order alleges that the company’s sales team had or used different market assumptions and revenue projections and was aware of “adverse facts” regarding customer orders that were omitted in the earnings call response. For example:
The $1 billion [market opportunity] figure was misleading because it included product markets that the sales team was not targeting and/or that were poor fits for Hyaline’s technical characteristics. Specifically, the estimate included the rigid-touch-sensors market and fingerprint-on-display market, which together comprised over 99 percent of the $1 billion market opportunity figure provided in the Form S-1.
No member of Zymergen’s sales team reviewed this assumption, nor did the information provided by the sales team support the inclusion of these markets. In fact, the sales team knew that past attempts to sell Hyaline in these markets had already failed after customers found Hyaline was either too expensive, unnecessary, or both. Thus, Hyaline’s customer pipeline maintained by the sales team did not list any customer that was testing the product for either the rigid-touch-sensors market or the fingerprint-on-display market as of the end of 2020. Despite this information, Zymergen included these markets in the $1 billion figure provided to investors.
The SEC’s press release focuses on these market potential numbers — where the internal estimate was “approximately $42 million to $100 million—or approximately 5 to 10 percent of the $1 billion market opportunity for 2020 presented in the Form S-1.” The press release has this reminder:
“Pre-revenue and early-stage companies that seek to tap the capital markets must do so with reasonable estimates of their market potential,” said Monique C. Winkler, Director of the SEC’s San Francisco Regional Office. “Today’s order finds that Zymergen failed to satisfy this obligation when it misled investors with what amounted to unsupported hype.”
While relevant to all companies, as the quote notes, it’s particularly important for pre-revenue and early-stage companies to carefully consider their market opportunity statements and for all involved to understand, agree and disclose what markets are included, or excluded, from the estimates and the assumptions involved.
Last week, the SEC posted this notice & request for comment for a proposed NYSE rule change that would amend Section 102.01 of the NYSE Listed Company Manual, which sets forth the minimum stockholder and trading volume initial listing requirements for companies seeking to list under the “domestic” initial listing standards.
A note included in Section 102.01B (under the heading “Calculations under the Distribution Criteria”) provides that, when considering a listing application from a company organized under the laws of Canada, Mexico or the United States (“North America”), the Exchange will include all North American holders and North American trading volume in applying the minimum stockholder and trading volume requirements of Section 102.01A. Notwithstanding the foregoing, the note included in Section 102.01B also provides that, in connection with the listing of any issuer from outside North America, the Exchange will have the discretion, but will not be required, to consider holders and trading volume in the company’s home country market or primary trading market outside the United States in determining whether a company is qualified for listing under Section 102.01, provided such market is a regulated stock exchange.
The Exchange proposes to amend the note in Section 102.01B under the heading “Calculations under the Distribution Criteria” to provide that, when considering a listing application from a company regardless of whether the company is domestic or foreign, the Exchange will include all holders on a global basis and worldwide trading volume in applying the minimum stockholder and trading volume requirements of Section 102.01A. As the discretion provided with respect to the inclusion of non-U.S. holders and trading volume in the current rule would no longer be relevant if there was no geographic limitation on the inclusion of holders or trading volume in meeting the standards, the Exchange proposes to delete from the note the discussion of how that discretion is currently applied.
This is a highly technical change, but NYSE says it will make a difference to non-U.S. companies conducting their initial public offerings in the United States … and NYSE’s ability to compete with Nasdaq:
It has been the Exchange’s experience in recent years that non-U.S. companies conducting their initial public offerings in the United States will often seek to sell a significant portion of the offering in the company’s home market rather than in the United States. Such companies and their underwriters have sometimes had difficulty placing shares with a sufficient number of investors in North America to meet the Exchange’s domestic distribution standards and, in some instances, companies have been unable to list on the Exchange because of the restrictions imposed by the current NYSE rule.
In some cases, this means that these companies are lost to the U.S. capital markets, but in other cases these companies are able to list on the Nasdaq Stock Market (“Nasdaq”), as Nasdaq’s distribution requirements do not include a limitation comparable to that included in the NYSE’s rule. The Exchange believes that the proposed rule change will enable it to compete more effectively for the listing of non-U.S. companies, as the rule change would remove a significant competitive disadvantage faced by the Exchange in competing with Nasdaq for the listing of these companies.
In addition to the competitive benefits described above, the Exchange believes that the current rule reflects an understanding of the functioning of the trading market for non-U.S. companies that is inconsistent with the current reality. … Given the ease of transfer of securities between different countries in the contemporary securities markets, there is no reason why the holders of a listed company’s securities outside of North America cannot be active real time participants in the trading market in the United States and that foreign holders should be viewed as less valuable as a source of liquidity in that market.
In the latest Timely Takes Podcast, I speak with Paul Hodgson, Senior Advisor to ESG data analytics firm ESGAUGE (and freelance writer and researcher for ICCR and Ceres), to review data on S&P 500 governance trends during the 2024 proxy season. During this 22-minute podcast, we discuss:
– Trends in the use of mandatory director retirement policies at S&P 500 companies
– How the S&P 500 is considering diversity in director recruitment
– Trends in board leadership
– Demand for new directors with current or former CEO experience
Last week, the SEC announced settled charges against Keurig Dr Pepper Inc. for allegedly inaccurate statements about the recyclability of its K-Cup pods. Keurig agreed to pay $1.5 million in civil penalties.
According to the SEC’s order, in annual reports for fiscal years 2019 and 2020, Keurig stated that its testing with recycling facilities “validate[d] that [K-Cup pods] can be effectively recycled.” But Keurig did not disclose that two of the largest recycling companies in the United States had expressed significant concerns to Keurig regarding the commercial feasibility of curbside recycling of K-Cup pods at that time and indicated that they did not presently intend to accept them for recycling.
In fiscal year 2019, sales of K-Cup pods comprised a significant percentage of net sales of Keurig’s coffee systems business segment, and research earlier conducted by a Keurig subsidiary indicated that environmental concerns were a significant factor that certain consumers considered, among others, when deciding whether to purchase a Keurig brewing system.
The Commission both misreads Keurig’s statement and overreacts to its own misreading. The pods were recyclable: Keurig chose a type of plastic that was recyclable and ran tests to show that the pods could be recycled. That claim is all Keurig’s statements reasonably should be read to say. Branding Keurig’s Forms 10-K as incomplete or inaccurate because Keurig did not also disclose that two recycling companies “did not presently intend to accept pods” for “commercial feasibility” reasons misreads Keurig’s statement that the pods could be recycled as an implicit assertion that the pods would be recycled.
This reading, however, places far too much weight on the word “effectively.” In the Commission’s view, the pods cannot be “effectively” recycled because two recycling companies were uninclined to accept them for curbside recycling.
She also points out that the order doesn’t claim Keurig’s statements were material and says the charges — brought only under Section 13(a) and Rule 13a-1, which require the filing of “complete and accurate” annual reports — were somewhat unique:
[T]he Order nowhere states that [the statements] were material. The closest the Order comes to addressing materiality is a statement that “sales of pods comprised a significant percentage of net sales of Keurig’s coffee systems business segment” in 2019, which appears in the same paragraph with the statement that “[c]onsumer research conducted by Keurig Green Mountain in 2016 indicated that, for certain consumers, environmental concerns were a significant factor, among others, considered when deciding whether to purchase a Keurig brewing system.” … That some consumers thought, among other factors, about environmental factors does not mean that the recyclability of pods was material to investors.
Rarely does the Commission bring standalone Section 13(a) and Rule 13a-1 charges. Telling to me is the absence of other charges—such as charges under Exchange Act Section 10(b) and Rule 10b-5, Securities Act Section 17(a), or even under Exchange Act Rule 12b-20, which requires issuers to add to their statements or reports such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading. I do not believe that Keurig’s recyclability statements support such charges because I do not think that they are false or misleading, which means there is no basis for Section 13(a) and Rule 13a-1 charges either.
That doesn’t mean this enforcement action is a one-off event. It’s somewhat reminiscent of charges against Fiat-Chrysler under Exchange Act Section 13(a) and Rule 12b-20. And it probably won’t be the last of its kind. WilmerHale’s Keeping Current blog says:
Notwithstanding Peirce’s dissent, the SEC’s action highlights the importance of ensuring disclosures are complete and not misleading due to the omission of adverse information known to the company. While this is the case for all disclosures and is nothing new, the context in which this action arises serves as an important reminder of the SEC’s continued focus on environmental and social disclosures and the agency’s willingness to look outside of SEC filings [e.g., sustainability reports] for additional context surrounding such disclosures.
This timing is interesting. Remember the SEC Division of Enforcement’s “Climate and ESG Task Force” focused on identifying material gaps or misstatements in companies’ ESG disclosures? Apparently, that task force is no more. As reported by Bloomberg:
The Securities and Exchange Commission shut down its Enforcement Division’s Climate and ESG Task Force within the past few months, an agency spokesperson told Bloomberg Law Thursday.
The agency launched the group in March 2021 under then-Acting SEC Chair Allison Lee with nearly two dozen staffers, who helped on the task force as they continued other jobs. SEC Chair Gary Gensler continued the group when he arrived at the agency in April 2021. The group went on to help with cases against Bank of New York Mellon Corp., Goldman Sachs Group Inc., Brazilian miner Vale SA and others.
That doesn’t mean that enforcement related to ESG misstatements isn’t still high on the Division’s watch list (clearly). The agency’s spokesperson also said that “the strategy has been effective, and the expertise developed by the task force now resides across the Division.”
