Month: August 2024
In litigation over the SEC climate disclosure rules, have petitioners created a strawman?
As soon as the SEC adopted final rules “to enhance and standardize climate-related disclosures by public companies and in public offerings” in March (see this PubCo post, this PubCo post, this PubCo post, and this PubCo post), there was a deluge of litigation—even though, in the final rules, the SEC scaled back significantly on the proposal, putting the kibosh on the controversial mandate for Scope 3 GHG emissions reporting and requiring disclosure of Scope 1 and/or Scope 2 GHG emissions on a phased-in basis only by accelerated and large accelerated filers and only when those emissions are material. Those cases were then consolidated in the Eighth Circuit (see this PubCo post) and, in April, the SEC determined to exercise its discretion to stay the final climate disclosure rules “pending the completion of judicial review of the consolidated Eighth Circuit petitions.” (See this PubCo post.) There are currently nine consolidated cases—with two of the original petitioners, the Sierra Club and the Natural Resources Defense Council, having voluntarily exited the litigation (see this PubCo post), and the National Center for Public Policy Research having filed a petition to join the litigation more recently. (See this PubCo post). In June, petitioners began to submit their briefs (see this PubCo post). Now, the SEC has filed its almost 25,000-word brief in the consolidated case, contending that petitioners have set up a “strawman—challenging reimagined rules that the Commission did not enact and criticizing a rationale that the Commission expressly disclaimed.” More specifically, the SEC’s brief defends its authority to adopt these rules and the reasonableness of its actions and process under the APA and contends that, as compelled commercial (or commercial-like) disclosure, the rules are consistent with the First Amendment.
Nasdaq proposes to crank up the heat on companies with shares trading below $1
In July, Virtu Financial, a financial services company and market maker, filed a rulemaking petition with the SEC, asking the SEC to adopt rules that “would prohibit National Securities Exchanges from listing high risk ‘penny stocks’ and mandate additional disclosures from issuers that would facilitate investors’ ability to assess the risks typically inherent in such stocks.” While “penny stocks” are subject to rules designed to prevent fraud and safeguard against potential market manipulation, Virtu said, exchange-listed securities are exempt from those rules “on the premise that exchange listing standards are stringent enough to weed out the riskiest issuers.” According to Virtu, “Main Street investors are being exposed to significant risk from issuers that have the imprimatur of being listed on an exchange when they are no different from penny stocks listed on the OTC market.” In recent years, Virtu contended, the number of companies at risk of delisting because of failure to meet the minimum price of $1 per share, primarily on Nasdaq, has spiked—a problem that has been exacerbated by the increasing use of reverse splits to avoid delisting, potentially resulting in problems for brokers and investors. While, in the last several years, Nasdaq has taken some steps to address the situation, Virtu contended that “minor tweaks to Nasdaq’s listing rules are insufficient to address the problem.” To that end, in the petition, Virtu requests “a more substantial overhaul.” Perhaps the petition gave Nasdaq a big nudge? We now have a new rule proposal from Nasdaq aimed at accelerating the delisting process for companies with shares that trade below $1. Briefly, under the proposal, a company would be suspended from trading on Nasdaq if the company has been non-compliant with the $1.00 bid price requirement for more than 360 days. In addition, any company that has effected a reverse stock split within the prior one-year period but becomes non-compliant with the $1.00 minimum bid price requirement would immediately be sent a Delisting Determination without any compliance period. A spokesman for Virtu told the WSJ that the proposed changes were “a step in the right direction. ‘While we are encouraged by Nasdaq’s efforts here, there remains more room for improvement across all markets,’ he said.”
Delaware Supreme Court considers advance notice bylaws
In this recent case, Kellner v. AIM ImmunoTech, the Delaware Supreme Court articulated a two-part framework for judicial consideration of advance notice bylaws in the event of a challenge to their adoption, amendment or enforcement. If the bylaws are contested, they must be “twice-tested—first for legal authorization, and second by equity”: first, a court must evaluate “whether the advance notice bylaws are valid as consistent with the certificate of incorporation, not prohibited by law, and address a proper subject matter”; second, a court must evaluate “whether the board’s adoption, amendment, or application of the advance notice bylaws were equitable under the circumstances of the case.” Also, it’s a good idea to make the bylaws “intelligible.” In this case, the Court held that “(1) one ‘unintelligible’ bylaw is invalid; (2) the remaining amended advance notice bylaws subject to this appeal are valid because they are consistent with the certificate of incorporation, not prohibited by law, and address a proper subject matter; and (3) the AIM board acted inequitably when it adopted the amended bylaws for the primary purpose of interfering with, and ultimately rejecting, Kellner’s nominations. Thus, the remaining bylaws challenged on appeal are unenforceable.” Nevertheless, Kellner’s deceptive conduct meant that his nominations notice would not stand.
Do companies adopt clawback policies exceeding minimum SEC requirements?
In 2022, after seven years of marinating on the SEC’s long-term agenda, the SEC adopted rules to implement Section 954 of Dodd-Frank, the clawback provision. The rules directed the national securities exchanges to establish listing standards requiring listed issuers to adopt and comply with a clawback policy and to provide disclosure about the policy and its implementation. Under the rules, the clawback policy was required to provide that, in the event the listed issuer was required to prepare an accounting restatement—including not just “reissuance,” or “Big R,” restatements, but also “revision” or “little r” restatements—the issuer must recover the incentive-based compensation that was erroneously paid to its current or former executive officers based on the misstated financial reporting measure. (See this PubCo post.) The requirements have been in effect for a bit now. But how did companies respond? Did they stick to the script? Or, after examining their own “governance philosophies,” did companies amp up the rules to actually expand the scope of their clawback policies? This piece from consultant FW Cook reporting on their study of large cap companies showed that “80% maintain an expanded clawback policy that goes beyond the SEC requirements.”
With the demise of Chevron deference, will the courts now turn to Skidmore?
In Loper Bright v. Raimondo, which overturned the 40-year-old doctrine of Chevron deference (see this PubCo post), SCOTUS highlighted the continued relevance of the doctrine articulated in Skidmore v. Swift & Co., often described as a principle of appropriate “respect” for agency interpretations, but something less than deference—i.e., the court must still be persuaded. The doctrine of Chevron deference, as you know, mandated that, if a statute did not directly address the “precise question at issue” or if there was ambiguity in how to interpret the statute, courts had to accept an agency’s reasonable interpretation of a law unless it was arbitrary or manifestly contrary to the statute. In Loper Bright, SCOTUS made clear that, while Chevron deference might now be toast, courts could still, in exercising their independent judgment in determining the meaning of statutory provisions, “seek aid from the interpretations of those responsible for implementing particular statutes,” citing Skidmore. Will Skidmore be the new go-to doctrine for courts adjudicating agency regulations? Not so far, according to this new article from Bloomberg.
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