First legal challenge to California’s board gender diversity statute heads to trial
You might remember that the first legal challenge to California’s board gender diversity statute, Crest v. Alex Padilla, was a complaint filed in 2019 in California state court by three California taxpayers seeking to prevent implementation and enforcement of the law. Framed as a “taxpayer suit,” the litigation sought to enjoin Alex Padilla, the then-California Secretary of State (now U.S. Senator), from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, SB 826, alleging that the law’s mandate is an unconstitutional gender-based quota and violates the California constitution. The court in that case has just denied each side’s motion for summary judgment after concluding that there were triable issues of material fact. The case will now be going to trial, which was initially set for October 25. However, on the court’s own motion, the trial was “trailed” to December 1. Stay tuned.
NYSE proposes to amend calculation of “votes cast” [updated]
Currently, where a matter requires shareholder approval under NYSE rules, the minimum vote required is a majority of the votes cast on the matter. But how do you count votes cast? Do you count abstentions? What about broker non-votes? The NYSE has historically advised that broker non-votes do not count as votes cast, but abstentions do. That means that, under the NYSE rules, approval requires that the votes in favor exceed the aggregate of the votes cast against the proposal plus abstentions. Unfortunately, that’s not how “votes cast” is typically defined for Delaware corporations. If Delaware corporations elect in their charter or bylaws to use a “votes cast” standard, abstentions are generally not counted as “votes cast”—because an abstention reflects a decision not to vote on the matter and the holder has not cast those votes—with the result that, for a proposal to be approved, the votes in favor of the proposal must exceed the votes cast against. Confused? You’re not alone. The NYSE has “observed that this approach has caused confusion among listed companies.” That’s why the NYSE has just filed with the SEC a proposal to amend that provision of the NYSE Listed Company Manual. [Update: This proposal has been approved.]
The Conference Board shares insights on how to convey your “sustainability story”
How do companies tackle the assignment of conveying to their shareholders and other stakeholders how they approach sustainability—in a way that is accurate, clear and genuine and that does not sound like a confected facsimile of every other peer company? That sounds like a challenging task. To address that challenge, The Conference Board convened a working group of over 300 executives from more than 150 companies who met five times between July 2020 and May 2021 to share ideas about how companies can effectively “tell their sustainability stories.” The Board captured some of those ideas in this report.
Climate risk disclosure “glaringly absent” in financial statements? Will regulators act to require more?
In one of the illustrative comments in Corp Fin’s just published sample comment letter on climate issues, Corp Fin asks companies to explain what consideration they may have given to providing in their SEC filings the same type of expansive climate-related disclosure that’s in their corporate social responsibility reports. One place in companies’ SEC filings where climate-related disclosure is “glaringly absent,” according to this report from the Carbon Tracker Initiative, is in the financial statements. Although many companies face serious climate risk, and many have even made net-zero pledges, the report “found little evidence that companies or their auditors considered climate-related matters in the 2020 financial statements.” According to the lead author of the report, “[b]ased on the significant exposure these companies have to transition risks, and with many announcing emissions targets, we expected substantially more consideration of climate matters in the financials than we found. Without this information there is little way of knowing the extent of capital at risk, or if funds are being allocated to unsustainable businesses….” Financial statement disclosure was so deficient, the report concluded, investors were essentially “flying blind.”
9th Circuit decides Section 11 standing in a direct listing
When the SEC was considering the NYSE’s proposal to permit direct listings of primary offerings, one of the frequently raised problems related to the potential “vulnerability” of “shareholder legal rights under Section 11 of the Securities Act.” Section 11 provides standing to sue for misstatements in a registration statement to any person acquiring “such security,” typically interpreted to mean a security registered under the specific registration statement. The “vulnerability” was thought to arise as a result of the difficulty plaintiffs may have—in a direct listing where both registered and unregistered shares may be sold at the same time—in “tracing” the shares purchased back to the registration statement in question. In approving adoption of the NYSE rule, the SEC said that it did not “expect any such tracing challenges in this context to be of such magnitude as to render the proposal inconsistent with the Act. We expect judicial precedent on traceability in the direct listing context to continue to evolve,” pointing to Pirani v. Slack Technologies. As the NYSE had observed, only the district court in Slack had addressed the issue, and had concluded that, at the pleading stage, plaintiffs could still pursue their claims even if they could not definitively trace the securities they acquired to the registration statement. However, the NYSE noted, the case was on appeal. (See this PubCo post.) That appeal, Pirani v. Slack Technologies, has just been decided by a three-judge panel of the 9th Circuit. The Court affirmed, with one dissent, the district court’s order, ruling that the plaintiff had standing to sue under Section 11.
Corp Fin posts sample climate comment letter
This afternoon, Corp Fin posted a sample letter to companies containing illustrative comments regarding climate change disclosures. Presumably, the goal is to help companies think about and craft their climate-related disclosure.
How do companies address governance issues for corporate political activity?
In the last couple of years, many CEOs have felt the need to voice their views on political, environmental and social issues, such as racial justice and voting restrictions. For example, after the murder of George Floyd and resulting national protests, many of the country’s largest corporations expressed solidarity and pledged support for racial justice. After January 6, a number of companies announced that their corporate PACs had suspended—temporarily or permanently—their contributions to one or both political parties or to lawmakers who objected to certification of the presidential election. However, as The Conference Board has recently stated, in the current “era of intense political polarization in the United States, and with the immediacy, ubiquity, and (often) inaccuracy of social media, companies are subject to ever-greater scrutiny for their political activities.” In this article, Deloitte and the Society for Corporate Governance report on a survey they conducted in July 2021 about companies’ approaches to publicly addressing controversial social and political issues. As the authors note, “taking a stance publicly on controversial or sensitive topics poses both risks and opportunities, including alienating or appealing to key stakeholders; enhancing or damaging the corporate culture; and eroding or building trust and brand reputation,” leading some companies to consider more systematically how they approach public engagement on these types of issues.
SEC Chair testifies before Senate Banking Committee—firmly denies paternity of all public companies!
On Tuesday last week, SEC Chair Gary Gensler gave testimony before the Senate Committee on Banking, Housing and Urban Affairs. His formal testimony covered a number of topics on the SEC’s agenda that Gensler (and others) have addressed numerous times in past: market structure and equity markets, predictive analytics, crypto, issuer disclosure, China, SPACs and Rule 10b5-1 plans. (See, e.g., this PubCo post and this PubCo post.) While the formal testimony covered some well-trod territory, the questioning highlighted the political polarization that we are likely to see continue as these proposals are presented for consideration.
SEC charges attorney rendering legal opinions with violations of Section 5
Attorneys who may think they can give short shrift to those pesky legal opinions to transfer agents might think twice after reading this complaint, SEC v. Frederick Bauman, filed on September 8, 2021, in the federal district court in Nevada. As described in the SEC’s litigation release, the SEC charged Bauman “with playing a critical role as an attorney who facilitated the unregistered sale of millions of shares of securities by two groups engaged in securities fraud.” According to the SEC’s complaint, between 2016 and August 2019, Bauman issued at least a dozen legal opinions to transfer agents advising that certain shares of four public companies were unrestricted and freely tradeable and that the holders of the shares were not affiliates of the public company issuers. However, the SEC alleged, the shareholders were actually part of groups that controlled those issuers, which made them affiliates under the securities laws. In “each instance where Bauman’s opinion letters violated Section 5,” the SEC alleged, “he lacked a reasonable basis for representing that the shareholders were not affiliates.” The complaint charged that the sales by these control groups were unregistered and violated Section 5 of the Securities Act and that Bauman violated Sections 5(a) and 5(c) of the Securities Act.
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