NYSE proposes trading halt in the event of reverse stock split
In 2023, as a corollary to revised listing standards related to notification and disclosure of reverse stock splits, Nasdaq adopted a rule change providing for a new regulatory halt procedure specific to the pre-market trading and opening of a Nasdaq-listed security undergoing a reverse stock split. Pointing to an increased volume of reverse splits, Nasdaq believed that the proposed amendment would help to better detect errors that might result from “market participants’ processing of the reverse stock split, including incorrect adjustment or entry of orders” before trading in the stock begins. (See this PubCo post.) Although, according to the NYSE, it has not experienced the same increased volume of reverse stock splits, it has now proposed to follow suit by amending Rule 123D (Halts in Trading) to “set forth specific requirements for halting and resuming trading in a security that is subject to a reverse stock split.” The proposed rule change has become effective under Rule 19b-4(f)(6).
Are boards overseeing AI?
Is there a hotter topic in the business world than AI? AI offers major opportunities for progress and productivity gains, but substantial risks as well. According to FactSet, 179 companies in the S&P 500 used the term “AI” during their earnings call for the fourth quarter of 2023, well above the 5-year average of 73. Among these companies, “the average number of times ‘AI’ was mentioned on their earnings calls was 13, while the median number of times ‘AI’ was mentioned on their earnings calls was 5. The term ‘AI’ was mentioned more than 50 times on the earnings calls of nine S&P 500 companies.” Similarly, Bloomberg reports that “[a]t least 203, or 41%, of the S&P 500 companies mentioned AI in their most recent 10-K report, Bloomberg Law’s review found. That’s up from 35% in 2022 and 28% in 2021. A majority of the disclosures focused on the risks of the technology, while others focused on its benefit to their business.” One of the many challenges that AI presents is on the corporate governance front, in particular board oversight, a topic addressed in this recent paper from ISS, AI Governance Appears on Corporate Radar. For the paper, ISS examined discussions of board oversight and director AI skills in proxy statements filed by S&P 500 companies from September 2022 through September 2023 to “assess how boards may evolve to manage and oversee this new area of potential risks and opportunities.”
Auditor problems are not just auditor problems
On Friday, SEC Enforcement charged audit firm BF Borgers CPA PC and its owner, Benjamin F. Borgers, with “massive fraud” involving “deliberate and systemic failures” to comply with PCAOB standards in auditing and reviewing financial statements incorporated into more than 1,500 SEC filings from January 2021 through June 2023. The charges also included “falsely representing to their clients that the firm’s work would comply with PCAOB standards; fabricating audit documentation to make it appear that the firm’s work did comply with PCAOB standards; and falsely stating in audit reports included in more than 500 public company SEC filings that the firm’s audits complied with PCAOB standards.” In settlement, the audit firm agreed to pay a $12 million civil penalty, and Benjamin Borgers agreed to pay a $2 million civil penalty, along with censures, cease-and-desists and permanent suspensions from appearing and practicing before the SEC as accountants. According to SEC Enforcement Director Gurbir S. Grewal,
“Ben Borgers and his audit firm, BF Borgers, were responsible for one of the largest wholesale failures by gatekeepers in our financial markets….As a result of their fraudulent conduct, they not only put investors and markets at risk by causing public companies to incorporate noncompliant audits and reviews into more than 1,500 filings with the Commission, but also undermined trust and confidence in our markets. Because investors rely on the audited financial statements of public companies when making their investment decisions, the accountants and accounting firms that audit those statements play a critical role in our financial markets. Borgers and his firm completely abandoned that role, but thanks to the painstaking work of the SEC staff, Borgers and his sham audit mill have been permanently shut down.”
This case has received an unusual amount of press—for an audit firm that many have never even heard of before—because Borgers was the auditor for the social media company of a certain former president. (See, e.g., the NYT, CNBC, CBS News) But, as we’ve often seen in other contexts, such as auditor independence (see, e.g., this PubCo post), this case also illustrates the importance for companies to keep in mind that these types of violations may have serious consequences not only for the audit firm, but also for the audit clients. In fact, in this case, the staff of Corp Fin and the Office of Chief Accountant issued this Staff Statement on Issuer Disclosure and Reporting Obligations in Light of Rule 102(e) Order against BF Borgers CPA PC.
Cooley Alert: Proposed Regulations on Stock Buyback Excise Tax
In April, the Treasury Department and the IRS published proposed regs on the 1% excise tax on stock buybacks imposed under the Inflation Reduction Act. As discussed in this comprehensive Cooley Alert, IRS Publishes Proposed Regulations on Stock Buyback Excise Tax, from our Comp & Benefits and Tax groups, the proposed regs take an expansive approach, applying the excise tax to transactions not typically considered stock buybacks, including redemptions and transactions that are economically similar to redemptions, such as exchanges of target stock in acquisitive reorganizations and other economically similar transactions. The Alert cautions that “companies may have excise tax liability or tax return filing obligations in myriad circumstances.”
Is the proxy advisory industry a net benefit or cost to shareholders?
In Seven Questions About Proxy Advisors, from the Rock Center for Corporate Governance at Stanford, the authors, David Larcker and Brian Tayan, examine the proxy advisory firm industry—all two of them. Well, actually, as the paper observes, there are a large number of small players, but Institutional Shareholder Services and Glass Lewis “control[] almost the entire market.” It’s well-known that recommendations from ISS and GL are considered important—sometimes even a major aspect of the battle—especially in contests for corporate control and director elections. But, the authors point out, the extent of their influence on “voting outcomes and corporate choices is not established, nor is the role they play in the market. Are proxy advisory firms information intermediaries (that digest and distill proxy data), issue spotters (that highlight matters deserving closer scrutiny), or standard setters (that influence corporate choices through their guidelines and models)? Because of the uncertainty around these questions, disagreement exists whether their influence is beneficial, benign, or harmful. Defenders of proxy advisors tout them as advocates for shareholder democracy, while detractors fashion them as unaccountable standard setters.” The paper examines “seven important questions about the role, influence and effectiveness of proxy advisory firms.” The authors explore why there is so much controversy about the purpose, role and contribution of proxy advisory firms, asking whether “the proxy advisory industry—as currently structured—[is] a net benefit or cost to shareholders?”
Cooley Alert: FTC bans noncompetes
The Federal Trade Commission has just voted, three to two, to prohibit post-employment noncompete agreements, with some limited exceptions. The ban will take effect 120 days after the final rule is published in the Federal Register. Why the ban? As discussed in this terrific new Cooley Alert, FTC Passes Sweeping Noncompete Ban, from our Labor and Employment group, the FTC noted that it views non-competes as “unfair method[s] of competition” that “restrict the freedom of American workers, suppress wages, and stifle new business and innovation.” The Alert indicates that the rule has an expansive application: in its definition of noncompetes, the rules sweeps in “certain provisions that are commonly thought to constitute alternatives to noncompetes.” In addition, the rule “broadly applies to noncompete agreements affecting virtually all workers—including employees, independent contractors, externs, interns, volunteers, apprentices or sole proprietors.” Under the rule, employers are required to “issue notices informing affected employees about the cessation of noncompete agreements.”
SEC and NAM appeal decision holding 2020 proxy advisor rule amendments unlawful
You probably remember the saga about the SEC’s rules regarding proxy advisory firms? Back in 2019, the SEC issued interpretive guidance that proxy advisory firms’ vote recommendations were, in the view of the SEC, “solicitations” under the proxy rules and subject to the anti-fraud provisions of Rule 14a-9. (See this PubCo post.) That guidance led ISS to sue the SEC and then-SEC Chair Jay Clayton. SEC rules codifying that interpretation were adopted in 2020. ISS amended its complaint, contending that the interpretation in the release and the subsequent rules were unlawful for a number of reasons, including that the SEC’s determination that providing proxy advice is a “solicitation” was contrary to law, that the SEC failed to comply with the Administrative Procedure Act and that the views expressed in the release were arbitrary and capricious. The National Association of Manufacturers, which favored the 2020 amendments, intervened on the side of the SEC (and also became a defendant). Over four years later, in February 2024, the DC District Court held that the SEC’s rules regarding proxy advisory firms were invalid, stating that the “SEC acted contrary to law and in excess of statutory authority when it amended the proxy rules’ definition of ‘solicit’ and ‘solicitation’ to include proxy voting advice for a fee.” (See this PubCo post.) Now, both NAM and the SEC have filed notices of appeal with the DC Circuit.
Change primary business focus? NYSE proposes to allow immediate delisting
The NYSE has filed a proposed rule change with the SEC that would allow the NYSE to commence immediate suspension and delisting procedures for a listed company if that company has “changed its primary business focus to a new area of business that is substantially different from the business it was engaged in at the time of its original listing or which was immaterial to its operations at the time of its original listing.” Comments on the proposal are due 21 days after publication in the Federal Register.
Cooley Alert—US Supreme Court: Pure Omissions Not Actionable Under Rule 10b-5(b)
Earlier this month, SCOTUS unanimously decided Macquarie Infrastructure Corp v. Moab Partners, holding that a pure omission of information required to be disclosed—in this case required in MD&A under Item 303—cannot form the basis of a private securities fraud action under Rule 10b-5(b). The Court was clear: “Pure omissions are not actionable under Rule 10b–5(b).” To be actionable under Rule 10b-5(b), the Court said, the omission must render an affirmative statement materially misleading. According to the Court, a “pure omission occurs when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.” Actionable “[h]alf-truths, on the other hand, are ‘representations that state the truth only so far as it goes, while omitting critical qualifying information’…….In other words, the difference between a pure omission and a half-truth is the difference between a child not telling his parents he ate a whole cake and telling them he had dessert.” As discussed in this new Cooley Alert, US Supreme Court: Pure Omissions Not Actionable Under Rule 10b-5(b), from our Securities Litigation + Enforcement and Public Companies groups, the “decision emphasizes the importance of assessing whether statements could be construed as being misleading by omission.”
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