For over two years, the SEC staff and advisory committees, credit rating agencies, investors, the Big Four accounting firms and other interested parties have been making noise about a popular financing technique called “supply chain financing.” It can be a perfectly useful financing tool in the right hands—companies with healthy balance sheets. But it can also disguise shaky credit situations and allow companies to go deeper into debt, often unbeknownst to investors and analysts, with sometimes disastrous ends. Currently, there are no explicit GAAP disclosure requirements to provide transparency about a company’s use of supply chain financing. That may be why Bloomberg has referred to supply chain financing as “hidden debt.” Late last month, the FASB announced that it had issued a proposed Accounting Standards Update intended to help investors and others “better consider the effect of supplier finance programs on a buyer’s working capital, liquidity, and cash flows.” The proposed ASU would require the buyer in a supply chain financing program to “disclose sufficient information about the program to allow an investor to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude.” The comment period will be open until March 21, 2022.
SEC charges company for alleged misstatements regarding director independence and disclosure control failures
As we head into a new proxy season, this SEC order involving settled charges against Leaf Group Ltd. might be a good case to keep in mind. In this case, the SEC charged that Leaf did not adequately identify and analyze—and did not maintain effective disclosure controls and procedures to identify and analyze— whether some of its directors were “independent” and whether there were “interlocking relationships between its directors and executive officers,” which led to “material misstatements and omissions in certain of its public filings,” including its proxy statement. As part of the settlement, Leaf was ordered to pay a civil penalty of $325,000. The company’s alleged failings as outlined in the order might serve to augment your seasonal checklist for examining issues of director independence.
If you think 2021 was a tough year for corporate political activity, 2022 may be even more challenging.
That’s according to a recent survey from The Conference Board of government relations executives and managers of political action committees. In the survey, 87% of respondents said they expect 2022 to be at least as challenging as 2021, and 42% anticipate that it may actually be worse. In the aftermath of the January 6, 2021 attack on the Capitol, many companies and CEOs spoke out, signed public statements and determined to pause or discontinue some or all political donations. The heated political climate also heightened sensitivity to any dissonance or conflict between those public statements or other publicly announced core company values and the company’s political contributions, further complicating the political environment for companies and executives. In the survey, respondents cited a number of factors that contributed to the difficult environment for corporate political activity in 2021: in particular, 77% cited the frequent emergence of new social and political issues on which companies faced pressure to take a stance. According to the Executive Director of The Conference Board ESG Center, “With the 2022 mid-term election year bringing sustained scrutiny, companies that engage in political activity need to make the affirmative case for why they do so….They should focus on engaging and educating both internal and external stakeholders on how their activities serve both corporate and societal purposes.”
Fiduciary duty claims against SPAC sponsor survive dismissal in Delaware under entire fairness standard
Is everything securities fraud, as Bloomberg’s Matt Levine frequently maintains? (See this PubCo post.) Or perhaps, in the SPAC environment, will all claims of fraudulent misrepresentation and omission now become claims of breach of fiduciary duty under Delaware law—and reviewed under the entire fairness standard? Is that a possible takeaway from the Delaware Chancery Court’s refusal last week to dismiss the complaint in In Re Multiplan Corp. Stockholders Litigation? In that case, the plaintiffs, purchasers of securities in a SPAC IPO, claimed that the defendant SPAC sponsor and SPAC board members disloyally impaired the plaintiffs’ rights to redeem their SPAC shares prior to consummation of the de-SPAC transaction by breaching their fiduciary duty to disclose to the plaintiffs material information about the de-SPAC target company. According to the Court, the “Delaware courts have not previously had an opportunity to consider the application of our law in the SPAC context. In this decision, well-worn fiduciary principles are applied to the plaintiffs’ claims despite the novel issues presented. Doing so leads to several conclusions.” In particular, one of those conclusions was that, due to inherent conflicts between the SPAC’s fiduciaries and the public stockholders, the entire fairness standard of review applied, establishing a very high bar for dismissal of the complaint.
As we anticipate new proposals from the SEC on human capital and climate disclosure, this recent paper from the Rock Center for Corporate Governance at Stanford, Seven Myths of ESG, seems to be especially timely. The trend to take ESG into account in decision-making by companies and investors, not to mention the focus on ESG issues by regulators and even associations like the Business Roundtable, is “pervasive,” say the authors. Still, ESG is subject to “considerable uncertainty.” In the paper, the authors set about debunking some of the most common and persistent myths about what ESG is, how it should be implemented and its impact on corporate outcomes, “many of which,” they contend, “are not supported by empirical evidence.” Their objective is to provide a better understanding of ESG so that companies, institutions and regulators can “take a more thoughtful approach to incorporating stakeholder objectives into the corporate planning process.” The authors’ seven myths are summarized below.