Month: October 2024
Is there a place for more inside directors on corporate boards?
In this article in the Harvard Business Review, a law professor from the University of Calgary makes “The Case for More Company Insiders on Boards.” From the end of World War II to the 1970s, he observes, the composition of most boards of U.S. companies was predominantly insider—75% of board directors were insiders in the decade after World War II. But, he maintains, that changed “in the wake of the rising distrust of all American institutions” after Viet Nam and Watergate in the 1970s, as new concepts of corporate governance emerged and the NYSE began to adopt listing rule changes, such as a requirement for independent audit committees. And after the Enron and WorldCom financial scandals of the 2000s, further changes in corporate governance requirements and expectations for board independence ultimately made the overwhelming prevalence of independent directors on corporate boards and committees de rigueur. By 2005, the author reports, 75% of directors of large U.S. public companies were independent and, as of 2023, that percentage had risen to 85%. But is that necessarily a good thing? Maybe not so much, the author contends. Rather, he maintains, the “empirical research on director independence suggests…that business leaders should re-consider the merits of inside directors.”
SEC approves Nasdaq proposal related to bid price compliance periods and reverse splits
In July, the SEC posted a Nasdaq rule change proposal to “modify the application of the bid price compliance periods where a listed company takes an action to achieve compliance with the bid price requirement and that action causes noncompliance with another listing requirement.” (See this PubCo post.) The proposed rule change was designed to address instances where, to regain compliance with the minimum bid price required by Nasdaq listing rules, a listed company implements a reverse stock split; however, while the reverse split may bring the company into compliance with the minimum bid price requirement, it may also, at the same time, lead to non-compliance with another listing rule—particularly, the requirements for the number of publicly held shares and number of public holders, triggering a new deficiency process with a new time period for the company to seek to regain compliance. That’s excessive, Nasdaq said, and too confusing for investors, possibly adversely affecting investor confidence in the market. Because Nasdaq believed it was inappropriate for a company to receive additional time to cure non-compliance with the newly violated listing standard, it sought, with the proposal, to eliminate the additional compliance period that would otherwise result from the newly created deficiency. But by August, the SEC hadn’t yet approved the proposal and extended the deadline for approval. Now, Nasdaq has filed Amendment No. 2 to the proposal—primarily clarifications—and the SEC has just given its approval to the proposal as amended. As a result, companies will need to carefully calculate the potential impact of a reverse split on other listing requirements to avoid these consequences where possible.
SEC charges director with proxy violation for failing to disclose personal relationship bearing on independence
Last week, the SEC announced settled charges against James R. Craigie, a former CEO, Chair and board member of Church & Dwight Co. Inc., an NYSE-listed “manufacturer of consumer-packaged goods,” for “violating proxy disclosure rules by standing for election as an independent director” without advising the board that maybe he really wasn’t quite so independent after all. This omission, the SEC alleged, caused the company’s proxy statements “to contain materially misleading statements.” Maybe you guessed that we’re not talking here about any of the NYSE-enumerated relationships that vitiate independence? No, we’re talking about something closer to the concept of “social independence”—something more amorphous than conventional, stock-exchange-defined independence—that some suggest can be even more compromising at times than the conventional variety. Craigie was alleged to have a “close personal friendship with a high-ranking Church & Dwight executive,” including paying more than $100,000 for the executive and his spouse to join Craigie and his spouse on “six trips that spanned eight countries on five continents.” Because Craigie never disclosed the relationship to the board and encouraged the executive to do the same, the SEC charged, the board was not aware of the relationship and the company’s proxy statements characterized Craigie incorrectly as an independent director. According to the Associate Director of the SEC’s Division of Enforcement, “[s]hareholders expect independent directors to exercise autonomous judgment in their decision making, free from undisclosed conflicts….By concealing his relationship with a company executive, Mr. Craigie undermined the board’s director independence process and compromised the company’s disclosures.” Craigie agreed to a five-year officer-and-director bar and to pay a civil penalty of $175,000. The case raises the thorny question of where to draw the line on personal relationships. Is an occasional dinner acceptable? If so, what about a weekend trip? A vacation trip? How many trips is too many? Just how thick do the personal connections have to be to taint independence? Caution seems to be the prescription here.
Last term SCOTUS gave the administrative state quite a thumping. Does it still have the urge to curb? [Updated 10/21 and 11/22]
If you thought that SCOTUS’ decision in Loper Bright last term tolling the bell for the 70-year old Chevron doctrine was the end of SCOTUS’ drubbing of the administrative state, look again—you may well be sorely mistaken. (See this PubCo post.) You might remember that, at a recent Ninth Circuit judicial conference, Justice Elena Kagan, expanding on her dissent in Loper Bright in response to a question, suggested that one reason the Court abandoned stare decisis in the case was plain hubris: in her view, the Court just believed that there was too much agency regulation and thought that the courts needed to step in. (See the Sidebar in this PubCo post.) And perhaps that conclusion didn’t require a giant leap. As far back as 2013 in his dissent in City of Arlington v. FCC (2013), Chief Justice Roberts worried that “the danger posed by the growing power of the administrative state cannot be dismissed.” Is there any reason to think that the urge to curb the administrative state has suddenly abated? Or will we perhaps see a temporary pause while agencies and court watchers catch their breath? As it turns out, there certainly could be opportunities for SCOTUS to continue the onslaught this term. The nondelegation doctrine—which SCOTUS studiously avoided addressing in Jarkesy v. SEC, its looming presence in the lower court decision notwithstanding—has once again reared its head, this time in Consumers’ Research v. FCC out of the Fifth Circuit. A petition for cert has just been filed in that case. And the concept of agency independence as established in a 1935 case, Humphrey’s Executor v. United States, may also be on the chopping block, as SCOTUS considers whether to take up the petition for cert in a Fifth Circuit decision, Consumers’ Research v. Consumer Product Safety Commission, in which the panel practically begged SCOTUS to review the case.
SEC brings securities fraud charges against Cassava Sciences
The SEC announced last week that it had filed a complaint against Cassava Sciences, Inc., a “pharmaceutical company with one primary drug candidate, PTI-125, a potential therapeutic for the treatment of Alzheimer’s disease,” for misleading statements about the results of a Phase 2 clinical trial for the potential therapeutic. Also charged in the complaint were the company’s founder and former CEO and its former Senior Vice President of Neuroscience. The complaint highlights and analyzes a number of misleading statements and omissions—an analysis that could be instructive for companies reporting on clinical trial results. In a related Order, the SEC also charged an associate medical professor at the CUNY, who was a consultant and the co-developer of the therapeutic, with manipulating the reported clinical trial results. The company agreed to pay a civil penalty of $40 million. The former CEO and former Senior VP agreed to pay civil penalties of $175,000 and $85,000, respectively, and to officer-and-director bars of three and five years. The consultant agreed to pay a civil penalty of $50,000. They were all charged with violating the antifraud provisions of the federal securities laws; the company was also charged with violating the reporting provisions. It’s been widely reported that, after the announcement of the settlement, the stock price fell by almost 11%. PTI-125 is now reported to be in Phase 3 clinical trials.
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