Category: Corporate Governance
SEC charges Newell with misleading disclosure and control failures
In this settled action, the SEC charged Newell Brands and its former CEO with providing misleading disclosure about a prominently featured non-GAAP financial measure—“core sales,” a key NGFM that Newell portrayed as providing “a more complete understanding of underlying sales trends.” As described in the Order and press release, Newell and its CEO took a number of actions—reclassifications, accrual reductions, order pull-forwards—that increased “core sales” growth, but the resulting increases “were out of step with Newell’s actual but undisclosed sales trends, allowing the company to announce ‘strong’ or ‘solid’ results in quarters it internally described as disappointing due to shortfalls in sales.” In fact, the SEC charged, Newell misled investors, depriving them of “information relevant to an accurate and complete understanding of Newell’s actual sales trends.” Moreover, in Newell’s effort to manage revenues, what began as tinkering with an NGFM metastasized into problems with GAAP accounting. According to the Associate Director of Enforcement, the SEC found that “Newell’s former CEO issued an instruction to ‘scrub’ the company’s accruals after he learned that the company was projecting a ‘massive’ and ‘disappointing’ miss for the quarter….Senior executives of public companies hold positions of trust, and they risk abusing the duties attendant to their offices when they reach into a company’s accounting control processes as a way of making up for performance shortfalls.” Newell agreed to pay a civil penalty of $12.5 million and its CEO to pay $110,000.
NYSE proposes listing standards for a “natural asset company”—what’s that?
The NYSE has proposed to adopt new listing standards for the common equity securities of a “Natural Asset Company,” a new type of public company defined by the NYSE as “a corporation whose primary purpose is to actively manage, maintain, restore (as applicable), and grow the value of natural assets and their production of ecosystem services.” And, “where doing so is consistent with the company’s primary purpose,” a NAC would also be required to “seek to conduct sustainable revenue-generating operations,” and “may also engage in other activities that support community well-being, provided such activities are sustainable.” In addition, NACs would be prohibited from engaging in unsustainable activities, that is, activities that “cause any material adverse impact on the condition of the natural assets under its control, and that extract resources without replenishing them.” Although existing regulatory and listing requirements would continue to apply to NACs, in many ways, the proposal contemplates something approaching a new NAC governance and reporting ecosystem, if you will, that would involve specific provisions in corporate charters, new mandatory policies (environmental and social, biodiversity, human rights, equitable benefit sharing), new prescribed responsibilities for audit committees and a new reporting framework, including mandatory “Ecological Performance Reports.” Why did the NYSE introduce this proposal? Notwithstanding all of the developments in ESG disclosure and investing (such as ESG funds), the NYSE contends that “investors still express an unmet need for efficient, pure-play exposure to nature and climate.” According to the Intrinsic Exchange Group, which pioneered the NAC concept and advises public sector and private landowners on the creation of NACs, “[b]y taking a NAC public through an IPO, the market transaction will succeed in converting the long-understood—but to-date unpriced—value of nature into financial capital. This monetization event will generate the funding needed to manage, restore, and grow healthy ecosystems around the world and bring us closer to achieving a truly sustainable, circular economy.” Will this proposal be a game changer to rescue our environment or merely a chimera? Time will tell. The proposal is open for comment for 21 days following publication in the Federal Register.
The rubber meets the road again—inflated sales, inflated projections charged at electric vehicle manufacturers
Is it Groundhog Day again? Haven’t we heard about this before? An electric vehicle manufacturer that went public through a SPAC transaction is charged by the SEC with fraudulently misrepresenting the status of its products, even posting a misleading video of a truck purportedly operating on hydrogen fuel when it did not. But no, it’s not Nikola Corporation (see this PubCo post). Just this past week, in the rush to beat the shutdown and fortify the SEC’s fiscal year-end statistics, Enforcement announced two settled actions against two manufacturers of electric vehicles for misleading investors. In the first case, Hyzon Motors Inc., a maker of hydrogen fuel cell electric vehicles (FCEVs), was charged with misleading investors about the status of Hyzon’s products, business relationships and vehicle sales, agreeing to pay a civil penalty of $25 million. Two executive officers, also charged, agreed to pay civil penalties of $100,000, and $200,000. Not to mention a restatement to reverse revenue improperly recognized. According to a Regional Director, “[t]ransparency in the form of full, fair, and accurate disclosure is fundamental to the federal securities laws….The defendants allegedly violated this principle by misleading investors about virtually every aspect of Hyzon’s business.” [Emphasis added.] In the second case, the predecessor to Spruce Power Holding Corporation, XL Fleet, which provided fleet hybrid electrical vehicles, was alleged to have misled investors about its sales pipeline and revenue projections. As the successor, Spruce agreed to pay a civil penalty of $11 million. According to the Associate Director of Enforcement, “[i]t goes without saying that investors commonly rely on revenue projections when deciding how and where to invest, and that’s perhaps especially true for investment decisions involving early-stage companies in the SPAC market….By linking its bold revenue projections to misleading claims about the company’s historical performance, XL Fleet misled investors by inhibiting their ability to differentiate between credible facts and mere aspiration.” It’s worth noting here that, in March last year, the SEC proposed new rules regarding SPACs, including rules related to the use of projections in SEC filings “to address concerns about their reliability.” (See this PubCo post.)
In an enforcement sweep, SEC charges multiple companies and insiders with untimely reporting under Sections 16 and 13(d)
Yesterday, the SEC announced a sweep enforcement action against several insiders and companies for failing to file Forms 4 (Section 16(a) short-swing trading reports) and Schedules 13D and G (reports by beneficial owners of more than 5%) on a timely basis. Using data analytics, the SEC staff identified the insiders charged as “repeatedly filing these reports late,” some delayed “by weeks, months, or even years.” In some cases, the companies failed to make filings on behalf of insiders after having volunteered to do so, and then failed to report the delinquencies in their own filings, as required by Reg S-K Item 405. Those charged were assessed penalties ranging from $66,000 to $200,000. In commenting on these cases, SEC Director of Enforcement Gurbir Grewal said that “[t]imely disclosure of insider transactions is critically important to both investors and the fair, orderly and efficient operation of our securities markets. According to today’s orders, the insiders and companies charged in these matters in the aggregate deprived investors of timely information about over $90 million in transactions….These enforcement actions also make clear that we will not hesitate to charge companies for causing their insiders’ disclosure violations where the companies took on the responsibility for making relevant filings for their insiders, and then acted negligently.” According to the Deputy Enforcement Director, “[s]everal years ago, we undertook a similar initiative to root out repeated late filers….Today’s enforcement action should serve to remind SEC filers that reporting obligations under the securities laws are not optional, and there are consequences for failing to file required forms in a timely manner.” Apparently, the SEC wants to send a message that late filings are not ok…and really late filing are really not ok. It’s also clear that the SEC views companies that do volunteer to make filings on behalf of their insiders—a common practice—as potentially contributing to their filing failures and will hold the companies responsible if the insiders fail to timely file. Message sent, message received?
SEC charges GTT with disclosure failures and control violations
This press release announces settled charges brought by the SEC against GTT Communications, Inc., a multinational telecommunications and internet service provider, for failure to disclose material information about “unsupported adjustments of more than $35 million” that had the effect of reducing COR, i.e., cost of revenue, and increasing reported operating income by at least 15% in three quarters from 2019 through 2020. According to the Order, in 2017 and 2018, GTT rapidly expanded its business through multiple acquisitions, but had difficulty absorbing and integrating the operations of the acquired, sometimes distressed, companies, especially with regard to accounting and controls. As a result, GTT was never able to reconcile data from two critical operating systems used to determine COR, ultimately leading to data integrity issues in its financial statements. In an attempt to achieve some consistency between the two systems, the SEC alleged, the company began to make accounting adjustments that, in the absence of effective controls, were “highly uncertain” and devoid of proper support. Moreover, the SEC alleged, GTT failed to provide adequate disclosure about the adjustments. In addition to antifraud violations, the SEC charged GTT with control violations: although GTT knew that its systems were inadequate to accurately report COR, “GTT failed to implement and maintain policies and procedures designed to provide reasonable assurance that the COR reflected in GTT’s financial statements was based on reasonable support.” However, because of GTT’s prompt self-reporting, remedial measures and substantial cooperation, the SEC did not impose a civil penalty. But perhaps the real penalty can be found here: in 2021, GTT was delisted from the NYSE, terminated its Exchange Act registration and filed for bankruptcy. GTT emerged in 2022 as a private company owned by certain of its former creditors—but eligible to use “Fresh-Start Reporting.”
Investor Advisory Committee recommends human capital management disclosure
On Thursday last week, the SEC’s Investor Advisory Committee voted to approve, with two abstentions, a subcommittee recommendation regarding human capital management disclosure. You probably remember that, in 2020, during the tenure of then-SEC Chair Jay Clayton, the SEC adopted a new requirement to discuss human capital as part of an overhaul of Reg S-K that applied a “principles-based” approach. The new rule limited the requirement to a “description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).” (See this PubCo post.) With workforce having grown in importance as a value driver, many viewed the amendment as a step in the right direction, but one that fell short. Subsequent reporting suggested that companies “capitalized on the fact that the new rule does not call for specific metrics,” as “[r]elatively few issuers provided meaningful numbers about their human capital, even when they had those numbers at hand” (although more recent studies have shown some expansion of disclosure). (See this PubCo post.) As you know, Corp Fin is currently working on a proposal to mandate enhanced company disclosures regarding HCM, and, according to the most recent Reg-Flex agenda, October is the target for issuance of the proposal. (See this PubCo post.) Recommendations from SEC advisory committees often hold some sway with the staff and the commissioners. Will the IAC recommendations have any impact?
SEC charges CBRE for violation of whistleblower protections
One area where SEC Enforcement appears to have focused its attention recently is whistleblower protections. In this Order against CBRE, Inc., the SEC brought settled charges against the commercial real estate services and investment firm for using an employee release form that the SEC alleged violated Exchange Act Rule 21F-17, the SEC’s whistleblower protection rule. The purpose of the whistleblower provisions in the Exchange Act, added in 2010 as part of Dodd-Frank, was to “encourage whistleblowers to report possible securities law violations by providing, among other things, financial incentives and confidentiality protections.” To prevent obstruction of that reporting, the SEC adopted Rule 21F-17, which provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.” The SEC’s order found that, “by conditioning separation pay on employees’ signing the release, CBRE took action to impede potential whistleblowers from reporting complaints to the Commission.” According to an SEC Regional Director, it “is critical that employees are able to communicate with SEC staff about potential violations of the federal securities laws without compromising their financial interests or the confidentiality protections of the SEC’s whistleblower program….We commend CBRE for its swift and far-reaching remediation and for its high level of cooperation with our staff, which is reflected in the terms of the resolution.” Is it time to take another look at your employee separation agreements and release forms?
Alliance Advisors wraps up the 2023 proxy season
Alliance Advisors, a proxy solicitation and corporate advisory firm, has posted its 2023 Proxy Season Review, an analysis of trends from the 2023 proxy season. Its principal message: ESG proposals saw sagging results again this year, “continuing a downward trend” from 2021. Although the number of shareholder proposals submitted to U.S. public companies was substantial (958 as of June 30, 2023, compared with 987 for all of 2022), Alliance Advisors reports that there was a dramatic decline from last year in “average support across all categories of shareholder proposals,” and “the number of majority votes plunged from 80 in 2022 to 28 in the first half of 2023.” More specifically, according to Alliance, average support on governance proposals fell to 29.9% in 2023 from 37.4% in 2022 and 38.4% in 2021, and there was a bit of a roller-coaster effect on compensation-related proposals, where average support declined to 23.7% in 2023 from 31.4% in 2022 but increased from 21% in 2021. Most pronounced was the change in average support for environmental and social (E&S) proposals, which declined to 18.3% in 2023 from 27.3% in 2022 and 37.2% in 2021. Will it turn out that 2021 was the “high-water mark” for shareholder proposals on ESG? The report explores trends in shareholder proposals and examines what may account for the flagging voting results.
You must be logged in to post a comment.