CAQ’s 2024 audit committee practices report discusses priorities and practices
The Center for Audit Quality has released its 2024 “Audit Committee Practices Report: Common Threads Across Audit Committees.” The report highlights the top five audit committee priorities identified by committee members in a survey from CAQ and discusses practices to improve effectiveness and other observations. Interspersed throughout the report are recommendations and advice from the CAQ. What was identified by respondents as the “most important topic, risk, or issue” for their audit committees in the next 12 months? Not financial reporting or financial audits—core responsibilities for the audit committee—as you might expect. Nope, it was cybersecurity. According to the CAQ report, the scope of audit committee responsibilities “continues to expand beyond the traditional remit of financial reporting and internal controls, internal and external audit, and ethics and compliance programs. Topics like cybersecurity, artificial intelligence (AI), and climate are now regularly showing up on many audit committee agendas, especially when it’s a matter of complying with regulatory disclosure requirements.” Audit committee members and their advisors may want to check out the report.
Chamber seeks to intervene in environmental group challenges to SEC climate disclosure rules
As you probably remember, the SEC’s climate disclosure rules were challenged not only by those contending that the rules went too far and that the SEC had no authority—think, for example, Liberty Energy, the State of Iowa and the Chamber of Commerce—but also by the Sierra Club and the Natural Resources Defense Council, which claimed that the SEC did have the legal authority to adopt the rules but did not go far enough and left out some important information. All those cases have recently been consolidated in the Eighth Circuit. Now, the Chamber of Commerce has moved for leave to intervene in the cases brought by the Sierra Club and the NRDC “to defend those portions of the final rule that refrained from imposing the additional disclosure requirements the environmental groups would have this Court require the SEC to impose.” The Sierra Club, the motion contends, “intends to argue that the SEC should have required public companies to disclose not only their own greenhouse-gas emissions, but also the emissions from the ‘use of [their] products’ and across their ‘supply chains’”; that is, that the SEC failed to impose a requirement to disclose Scope 3 GHG emissions.
Delaware Supreme Court applies MFW framework to other conflicted transactions
In In re Match Group, Inc. Derivative Litigation, the Delaware Supreme Court answered some important questions about the standard of review applicable to conflicted transactions under Delaware law. The first question relates to the application of the model used in Kahn v. M & F Worldwide Corp., commonly referred to as the “MFW framework.” In that 2014 case, the Delaware Supreme Court held that, instead of the more stringent “entire fairness” standard of review that would ordinarily apply in the context of mergers between a controlling stockholder and its corporate subsidiary, the business judgment standard of review should govern “where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.” The question remained, however, whether, in the context of conflicted controlling stockholder transactions that do not involve freeze-out mergers, MFW may be applied to invoke the business judgment rule. And in a related question, can the business judgment rule be applied if the “defendant shows either approval by an independent special committee or approval by an uncoerced, fully informed, unaffiliated stockholder vote,” but not both? In addition, the Court addressed the question of whether all members of an “independent special committee” must be “independent” to satisfy the requirements of MFW.
Another House hearing on climate disclosure rules?
Yesterday, the House Financial Services Committee held a hearing entitled “Beyond Scope: How the SEC’s Climate Rule Threatens American Markets.” Since, as one of the committee members observed, this is their sixth hearing on the SEC and twelfth on climate change, there was a lot of the same old, same old—just from different witnesses. (One Committee member called this topic a “manufactured culture war” that the Committee is relitigating; why was the Committee wasting time on this topic when they should be dealing with the problems in housing?) At the hearing, we heard familiar statements to the effect of: the SEC is just pandering to political interest groups; the rules require “extensive and granular” disclosure of information that many do not view to be material; the rules are outside the SEC’s authority and an instance of “mission creep”; this is an attempt by the Biden administration to use regulation to force on the public the climate agenda that it was unable to get through Congress; the costs will be burdensome especially for smaller companies and will result in higher costs and fewer public companies. Or: investors have been demanding this information; voluntary disclosure is inconsistent, unreliable and not comparable; and many companies will already need to comply with the more rigorous rules of the EU and California anyway, so the cost will not be as great as some fear; the SEC acted completely within its wheelhouse. Sound familiar? But there were some highlights, so let’s hit those.
NYSE proposes to allow continued SPAC listing for additional six months
For those doing SPACs, you may want to take note of this recent proposed rule change from the NYSE. The proposal would amend Section 102.06 of the Listed Company Manual to allow a SPAC to “remain listed until forty-two months from its original listing date if it has entered into a definitive agreement with respect to a business combination within three years of listing.”
What happened at the Corp Fin Workshop of PLI’s SEC Speaks 2024?
At the Corp Fin Workshop last week, a segment of PLI’s SEC Speaks 2024, the panel focused on disclosure review, a task that occupies 70% of Corp Fin attorneys and accountants. The panel discussed several key topics, looking back to 2023 and forward to 2024. Some of the presentations are discussed below.
The jury finds shadow trading is a thing
The trial took eight days. The jury took two hours. On Friday, in the case of SEC v. Panuwat, the jury in a federal district court in California determined that Matthew Panuwat was civilly liable for insider trading under the misappropriation theory. This case dates back to August 2021, when the SEC filed a complaint in the U.S. District Court charging Panuwat, a former employee of Medivation Inc., an oncology-focused biopharma, with insider trading in advance of Medivation’s announcement that it would be acquired by a big pharma company, Pfizer. As you know by now, this case has often been viewed as highly unusual: Panuwat didn’t trade in shares of Medivation or shares of the acquiror, nor did he tip anyone about the transaction. No, the SEC’s novel—but winning—theory of the case was that Panuwat engaged in “shadow trading,” using the information about the acquisition of his employer to purchase call options on Incyte Corporation, another biopharma that the SEC claimed was comparable to Medivation, based on an assumption that the acquisition of Medivation at a healthy premium would probably boost the share price of Incyte. Panuwat made over $120,000 in profit. According to a statement from the Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, “[a]s we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple. Defendant used highly confidential information about an impending announcement of the acquisition of biopharmaceutical company Medivation, Inc., the company where he worked, by Pfizer Inc. to trade ahead of the news for his own enrichment. Rather than buying the securities of Medivation, however, Panuwat used his employer’s confidential information to acquire a large stake in call options of another comparable public company, Incyte Corporation, whose share price increased materially on the important news.”
In its discretion, SEC issues stay of final climate disclosure rules
The SEC has determined, in this Order posted today, to exercise its discretion to stay the final climate disclosure rules “pending the completion of judicial review of the consolidated Eighth Circuit petitions.” If you have been following the SEC travails regarding the climate disclosure rules, you know that there were ten different petitions—the tenth petition having been filed by the National Legal and Policy Center and the Oil and Gas Workers Association—consolidated in the Eighth Circuit, challenging the rules and several asking the court for a stay. The SEC had opposed the stay. (See, e.g., this PubCo post, this PubCo post and this PubCo post.) (One of the petitioners, Liberty Energy, even filed a precautionary complaint challenging the final rules in a Texas District Court, just in case jurisdiction was ultimately not accepted in the Court of Appeals.) At the end of March, the SEC had filed a motion to establish a consolidated briefing schedule relating to all of the motions seeking a stay; 31 petitioners opposed the SEC’s motion, instead asking the court to expedite briefing on the existing and expected emergency stay motions. Under the Exchange Act and the APA, the SEC “has discretion to stay its rules pending judicial review if it finds that ‘justice so requires.’” According to the Order, the SEC has determined that justice requires that the SEC stay the final rules.
Commissioner Uyeda warns: the SEC “has gone astray”
In remarks at PLI’s SEC Speaks, SEC Commissioner Mark Uyeda expressed his concern that the SEC “has gone astray”: instead of focusing on “its narrow mission,” Uyeda fears, the SEC is acceding to the pressure of political activists who “seek to transform the agency’s authority to achieve policy objectives that are outside of its statutory mandate.” To illustrate, Uyeda highlights two examples: the climate disclosure rules, just adopted by the SEC, and the conflict minerals rules, which were adopted by the SEC over a decade ago and are here presented as a cautionary tale. While the conflict minerals rules were actually mandated by Congress, the climate disclosure rules are something different: the SEC has “acted on its own volition,” Uyeda contends, in adopting “a climate disclosure rule that seeks to exert societal pressure on companies to change their behavior. It is the Commission that determined to delve into matters beyond its jurisdiction and expertise.” To Uyeda, “this action deviates from the Commission’s mission and contravenes established law.”
Commissioner Peirce blasts SEC for failing to engage with the public
In her remarks yesterday at PLI’s SEC Speaks—after a detour to excoriate the SEC’s “maze of staff guidance” defining industry practices that has become effectively “mandatory” even in the absence of input from the full SEC (with crypto accounting under SAB 121 coming in for her particular animus)—Commissioner Hester Peirce turned to her main topic: the “dwindling of genuine Commission and staff engagement with the public.” When it comes to providing interpretive guidance or otherwise engaging with industry, she asserts, the SEC is “closed for business.” For this development, she ascribes blame to the Commission itself. She has some ideas for overcoming the problem.
You must be logged in to post a comment.