In testimony this week before the Subcommittee on Financial Services and General Government of the House Appropriations Committee, SEC Chair Gary Gensler talked about the budget request for SEC operations for next year. He emphasized that, over the last five years, while the capital markets have grown to $100 trillion, the SEC has “shrunk.” And for Corp Fin, the “shrinkage” has been quite significant.
You might remember that the first legal challenge to SB 826, California’s board gender diversity statute, Crest v. Alex Padilla, was a complaint filed in 2019 in California state court by three California taxpayers seeking to prevent implementation and enforcement of the law. Framed as a “taxpayer suit,” the litigation sought a judgment declaring the expenditure of taxpayer funds to enforce or implement SB 826 to be illegal and an injunction preventing the California Secretary of State from expending taxpayer funds and taxpayer-financed resources for those purposes, alleging that the law’s mandate is an unconstitutional gender-based quota and violates the California constitution. A bench trial began in December in Los Angeles County Superior Court that was supposed to last six or seven days, but closing arguments didn’t conclude until March. (See this PubCo post.) The verdict from that Court has just come down. The Court determined that SB 826 violates the Equal Protection Provisions of the California Constitution and enjoined implementation and enforcement of the statute. This verdict follows summary judgment in favor of the same plaintiffs in their case against AB 979, California’s board diversity statute regarding “underrepresented communities,” which was patterned after the board gender diversity statute. (See this PubCo post.) The Secretary of State has not yet indicated whether there will be an appeal. In light of pressures from institutional investors and others for board gender diversity, together with the Nasdaq “comply or explain” board diversity rule (see the SideBar below), what impact the decision will have on board composition remains to be seen.
Most likely, what comes to mind when you think about companies’ impeding the ability of a whistleblower to communicate with the SEC are allegations of overly ambitious confidentiality provisions in employment agreements or company policies. Not so in this case. In April, the SEC issued an Order in connection with a settled action charging David Hansen, a co-founder and officer of NS8, Inc., a privately held fraud-detection technology company, with violating the whistleblower protections of the Exchange Act. The SEC alleged that, after an NS8 employee raised concerns to Hansen about a possible securities law violation, Hansen took action to limit the employee’s access to the company’s IT systems. The SEC charged that these actions impeded the employee’s ability to communicate with the SEC in violation of Rule 21F-17(a) and imposed a $97,000 civil penalty. SEC Commissioner Hester Peirce dissented, contending that the SEC’s Order “does not explain what, precisely, Mr. Hansen did to hinder or obstruct direct communication between the NS8 Employee and the Commission.”
Pharmas, biotechs and others may want to take notice—if they haven’t already—of a series of SEC comment letters to global biopharmaceutical company, Biogen, about one of the company’s non-GAAP financial measures. More specifically, in 2021, the SEC staff objected to the company’s exclusion from non-GAAP R&D and non-GAAP net income of material upfront and premium payments made in connection with collaboration agreements. In the end, Biogen agreed to discontinue these adjustments going forward and to recast prior period information. As reported in this article in MarketWatch, this year a number of biopharmas have taken a lesson from the exchange between Biogen and the SEC staff and have included language in their earnings releases explaining similar changes in practice, following guidance from the SEC staff, regarding exclusion of upfront payments from non-GAAP R&D. Moreover, the article indicated, the impact of the changes was “not insignificant,” leading, in one example, to a change of $0.15 in EPS for a single quarter.
Yesterday, the SEC announced that it had extended or reopened the public comment period on three proposals, including the proposed rulemaking to enhance and standardize climate-related disclosures. (See this PubCo post, this PubCo post and this PubCo post.) The comment period was originally scheduled to close on May 20, 2022, but will now be extended until June 17, 2022. (And rumor has it that the SEC will often accept comments submitted within a reasonable time after the deadline.) According to SEC Chair Gary Gensler, the proposal had “drawn significant interest from a wide breadth of investors, issuers, market participants, and other stakeholders….Commenters with diverse views have noted that they would benefit from additional time to review these three proposals, and I’m pleased that the public will have additional time to provide thoughtful feedback.” For example, in April, 36 trade and industry associations asked the SEC to provide a 180-day comment period, contending that, “given the size, scope, complexity, and ramifications of the rule,“ the time period allowed for comment was “woefully inadequate for the magnitude of this rule, which runs to 506 pages, contains 1,068 footnotes, references 194 dense academic and governmental reports, imposes a $10.235 billion cost on society, and seeks answers to 196 discrete questions.“ While the extension will certainly be welcome, will it be considered sufficient?
SEC’s Small Business Capital Formation Advisory Committee discusses climate disclosure and SPAC proposals
On Friday, the SEC’s Small Business Capital Formation Advisory Committee held a virtual meeting to discuss two of the SEC’s recent rulemaking initiatives: climate disclosure and SPACs, particularly as those proposals, if adopted, would impact smaller public companies and companies about to go public. The committee heard several presentations, including summaries of the proposals from SEC staff members, and voiced concerns about a number of challenges presented by the proposals. The committee also considered potential recommendations that it expects to make to the SEC.
Corp Fin has posted a sample comment letter to companies about potential disclosure obligations arising out of the Russian invasion of Ukraine, the international response to it and related supply chain issues. Corp Fin wants companies to provide more “detailed disclosure, to the extent material or otherwise required,” about the direct or indirect impact on their businesses of their exposure to or business relationships with Russia, Belarus or Ukraine, any goods or services sourced in those countries and supply chain disruption. The letter provides a useful resource to help companies think through how their businesses have been or may be affectedCorp Fin has posted a sample comment letter to companies about potential disclosure obligations arising out of the Russian invasion of Ukraine, the international response to it and related supply chain issues. Corp Fin wants companies to provide more “detailed disclosure, to the extent material or otherwise required,” about the direct or indirect impact on their businesses of their exposure to or business relationships with Russia, Belarus or Ukraine, any goods or services sourced in those countries and supply chain disruption. The letter provides a useful resource to help companies think through how their businesses have been or may be affected, even if they don’t have operations in Russia or Ukraine.
In Salzberg v. Sciabacucchi (pronounced Shabacookie), the Delaware Supreme Court unanimously held that charter provisions designating the federal courts as the exclusive forum for ’33 Act claims were “facially valid.” (See this PubCo post.) Given that Sciabacucchi involved a facial challenge, the Supreme Court had viewed the question of enforceability as a “separate, subsequent analysis” that depended “on the manner in which it was adopted and the circumstances under which it [is] invoked.” With regard to the question of enforceability of exclusive federal forum provisions if challenged in the courts of other states, the Delaware Supreme Court said that there were “persuasive arguments,” such as due process and the need for uniformity and predictability, that “could be made to our sister states that a provision in a Delaware corporation’s certificate of incorporation requiring Section 11 claims to be brought in a federal court does not offend principles of horizontal sovereignty,” and should be enforced. But would they be? Following Sciabacucchi, in light of the perceived benefits for defendants of litigating Securities Act claims in federal court, many Delaware companies that did not have FFPs adopted them, and companies with FFPs involved in ’33 Act litigation tried to enforce them by moving to dismiss state court actions. In 2020, in an apparent case of first impression, Wong v. Restoration Robotics, the San Mateo Superior Court in California upheld application of the FFP, declining “jurisdiction over the claims alleged against Restoration Robotics and its officers and directors only, pursuant to the FFP.” (See this PubCo post.) Plaintiff appealed. The California Court of Appeal, First Appellate District, has just affirmed the lower court’s decision, upholding enforcement of the FFP.
As described in this press release, the SEC has filed a complaint against Vale S.A., a publicly traded (NYSE) Brazilian mining company and one of the world’s largest iron ore producers, charging that it made “false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam. The collapse killed 270 people, caused immeasurable environmental and social harm, and led to a loss of more than $4 billion in Vale’s market capitalization.” The SEC alleged that Vale “fraudulently assured investors that the company adhered to the ‘strictest international practices’ in evaluating dam safety and that 100 percent of its dams were certified to be in stable condition.” Significantly, these statements were contained, not just in Vale’s SEC filings, but also, in large part, in its sustainability reports. According to Gurbir Grewal, Director of Enforcement, “[m]any investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions….By allegedly manipulating those disclosures, Vale compounded the social and environmental harm caused by the Brumadinho dam’s tragic collapse and undermined investors’ ability to evaluate the risks posed by Vale’s securities.” Notably, the press release refers to the SEC’s Climate and ESG Task Force formed last year in the Division of Enforcement “with a mandate to identify material gaps or misstatements in issuers’ ESG disclosures, like the false and misleading claims made by Vale.” The SEC’s charges arising out of this horrific accident are a version of “event-driven” securities litigation—brought this time, not by shareholders, but by the SEC.