We have all watched with anguish and trepidation the profound horror inflicted on Ukraine—transfixed by the brilliant and courageous fight of the Ukrainian people. That fight is also being pursued in much smaller ways, even through action at the SEC. The Ukrainian-American Bar Association, a former Ukrainian finance minister and a U.S. charity focused on Ukraine have just filed a rulemaking petition with the SEC, requesting that the SEC enact a rule requiring issuers to disclose their business dealings in and with the Russian Federation and the Republic of Belarus. Whether or not the SEC considers or accedes to the request remains to be seen, but let’s hope that Ukraine’s victory is so swift that this rulemaking becomes entirely unnecessary.
The Council of the Corporation Law Section of the Delaware State Bar Association has provided recommendations to the Delaware General Assembly for a number of changes to the Delaware General Corporation Law, some of them significant, such as an amendment authorizing charter provisions that would eliminate the personal liability of specified officers for breaches of the duty of care—basically, an extension of DGCL Section 102(b)(7). Typically, the Delaware legislature follows the Council’s recommendations. If adopted and signed into law, the amendments would become effective on August 1, 2022, and generally would apply to actions taken on or after August 1. Several of the recommended changes are discussed below.
“Statement Regarding SPAC Matter,” is the latest from SEC Commissioner Hester Peirce. Seems completely anodyne, doesn’t it? But, as they say, looks can be deceiving. Instead, it’s a withering criticism of the SEC’s failure to declare a SPAC registration statement effective in time to allow a de-SPAC merger to go forward, implicitly suggesting at the end that the SEC may have displayed a lack of good faith in its Kafkaesque process (her metaphor, not mine), which had the effect of stringing the registrant along for many months until it was too late to go forward and liquidation was the only possible result. Peirce presumes the failure to declare effectiveness was based on the SEC’s “newfound hostility to SPAC capital formation.” Of course, as none of the correspondence with the SEC has been posted, we really have no independent information about what happened or precisely why the registration statement was not declared effective; it’s certainly possible that the deal was more thorny than the norm. Peirce calls SEC “inaction on a request for acceleration of the effective date of a registration statement…highly unusual.” But then, so is her statement.
Since 2019, as part of its strategy of enhancing transparency and accessibility through proactive stakeholder engagement, the PCAOB has been engaging with audit committee chairs at U.S. public companies that have had audits inspected by the PCAOB during the year. The PCAOB staff continued this outreach to audit committee chairs during 2021, engaging in conversations with over 240 audit committee chairs. The results are discussed in this new report. The discussions involved required communications between the auditor with the audit committee and discussions outside of required communications, auditor strengths and weaknesses, PCAOB inspection reports, quality control, use of technology and matters outside of the financial statements. The PCAOB believes that the audit committee’s oversight of the auditor and the audit process is a critical job. Accordingly, “engaged and informed audit committees can be a force for elevating audit quality to the benefit of investors and our capital markets broadly.”
Earlier this week, SEC Chair Gary Gensler gave the keynote address for an investor briefing on the SEC Climate Disclosure Rule presented by nonprofit Ceres. In his remarks, entitled “Building Upon a Long Tradition,” Gensler vigorously pressed his case that the SEC’s new climate disclosure proposal (see this PubCo post, this PubCo post and this PubCo post) was comfortably part of the conventional tapestry of SEC rulemaking. Growing out of the core bargain of the 1930s that let investors “decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures,” Gensler observed, the SEC’s disclosure regime has continually expanded—adding disclosure requirements about financial performance, MD&A, management, executive comp and risk factors. Over the generations, the SEC has “stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions.” As has been the case historically, the SEC, he insisted, “has a role to play in terms of bringing some standardization to the conversation happening between issuers and investors, particularly when it comes to disclosures that are material to investors.” The proposed rules, he said, “would build on that long tradition.” But has everyone bought into that view?
These days, with our government warning regularly about the likelihood of breaches in cybersecurity, concerns about cyber threats have only multiplied. Introducing the SEC’s new proposal for cybersecurity disclosure in March (see this PubCo post), SEC Corp Fin Director Renee Jones said that, in today’s digitally connected world, cyber threats and incidents pose an ongoing and escalating threat to public companies and their shareholders. In light of the pandemic-driven trend to work from home and, even more seriously, the potential impact of horrific global events, cybersecurity risk is affecting just about all reporting companies, she continued. While threats have increased in number and complexity, Jones said, currently, company disclosure about cybersecurity is not always decision-useful and is often inconsistent, not timely and sometimes hard for investors to locate. What’s more, some material incidents may not be reported at all. Audit Analytics has just posted a new report regarding trends in cybersecurity incident disclosures. The report indicates that, in 2021, there was a 44% increase in the number of breaches disclosed, from 131 in 2020 to 188 in 2021, the most breaches disclosed in a single year since 2011. And, since 2011, the number of cybersecurity incidents disclosed annually has increased nearly 600%. Interestingly, however, in 2021, only 43% of cybersecurity incidents were disclosed in SEC filings, the report said.
According to a statement from the White House, President Biden is planning to nominate two new SEC commissioners, Democrat Jaime Lizárraga to fill the seat of departing Commissioner Allison Herren Lee (see this PubCo post), and Republican Mark Uyeda to fill the seat recently vacated by former Commissioner Elad Roisman (see this PubCo post). The statement indicates that Lizárraga serves as a Senior Advisor to House Speaker Nancy Pelosi, where he “oversees issues relating to financial markets, housing, international financial institutions, immigration, and small business policy.” Mark Uyeda has been a career attorney at the SEC for 15 years, but is currently detailed to the Senate Committee on Banking, Housing, and Urban Affairs, where he serves as Securities Counsel on the Committee’s Minority Staff. Both nominations are subject to Senate confirmation.
Board diversity statute for “underrepresented communities” held unconstitutional under California’s equal protection provisions
On April 1, the L.A. County Superior Court granted the plaintiffs’ motion for summary judgment in Crest v. Padilla, the taxpayer litigation challenging AB 979, California’s board diversity statute for “underrepresented communities.” (See this PubCo post.) Unfortunately, at the time, only a minute order was released, which did not offer any explanation of the Court’s reasoning. Now, a new 24-page Court Order, which provides the Court’s reasoning, has been made available, and, in it, the Court concludes that the statute, Corporations Code § 301.4, violates the equal protection clause of the California Constitution on its face. Why? Because, in the Court’s view, § 301.4 treats similarly situated individuals differently based on suspect racial and other categories that are not justified by a compelling interest, nor is the statute narrowly tailored to address the interests identified. Will this case have a spillover effect on the decision currently pending of plaintiffs’ taxpayer challenge to California’s board gender diversity statute, SB 826? According to Reuters, the California State Senator who authored SB 826 said that “the case involved a ‘very different set of facts and distinctly different legal issues.’”
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.