Category: Corporate Governance
Fiduciary duty claims against SPAC sponsor survive dismissal in Delaware under entire fairness standard
Is everything securities fraud, as Bloomberg’s Matt Levine frequently maintains? (See this PubCo post.) Or perhaps, in the SPAC environment, will all claims of fraudulent misrepresentation and omission now become claims of breach of fiduciary duty under Delaware law—and reviewed under the entire fairness standard? Is that a possible takeaway from the Delaware Chancery Court’s refusal last week to dismiss the complaint in In Re Multiplan Corp. Stockholders Litigation? In that case, the plaintiffs, purchasers of securities in a SPAC IPO, claimed that the defendant SPAC sponsor and SPAC board members disloyally impaired the plaintiffs’ rights to redeem their SPAC shares prior to consummation of the de-SPAC transaction by breaching their fiduciary duty to disclose to the plaintiffs material information about the de-SPAC target company. According to the Court, the “Delaware courts have not previously had an opportunity to consider the application of our law in the SPAC context. In this decision, well-worn fiduciary principles are applied to the plaintiffs’ claims despite the novel issues presented. Doing so leads to several conclusions.” In particular, one of those conclusions was that, due to inherent conflicts between the SPAC’s fiduciaries and the public stockholders, the entire fairness standard of review applied, establishing a very high bar for dismissal of the complaint.
Paper debunks seven myths of ESG
As we anticipate new proposals from the SEC on human capital and climate disclosure, this recent paper from the Rock Center for Corporate Governance at Stanford, Seven Myths of ESG, seems to be especially timely. The trend to take ESG into account in decision-making by companies and investors, not to mention the focus on ESG issues by regulators and even associations like the Business Roundtable, is “pervasive,” say the authors. Still, ESG is subject to “considerable uncertainty.” In the paper, the authors set about debunking some of the most common and persistent myths about what ESG is, how it should be implemented and its impact on corporate outcomes, “many of which,” they contend, “are not supported by empirical evidence.” Their objective is to provide a better understanding of ESG so that companies, institutions and regulators can “take a more thoughtful approach to incorporating stakeholder objectives into the corporate planning process.” The authors’ seven myths are summarized below.
SEC imposes $125 million civil penalty on Nikola for alleged material misstatements
Happy New Year!
In July of last year, as discussed in this PubCo post, the SEC and DOJ charged Trevor Milton, the founder, former CEO and executive chair of Nikola Corporation, with securities fraud for disseminating, primarily through social media, false and misleading information about Nikola’s technological achievements. In addition to civil SEC charges, Milton faced two counts of criminal securities fraud and one count of wire fraud, with maximum 20- and 25-year prison terms if convicted. He pleaded not guilty. But, interestingly, there was no word about the company. Was the company completely off the hook for the CEO’s alleged misrepresentations? Now we know that the answer is—far from it. In December, the SEC announced that Nikola had “agreed to pay $125 million to settle charges that it defrauded investors by misleading them about its products, technical advancements, and commercial prospects.” According to Gurbir Grewal, the SEC’s Director of Enforcement, “Nikola Corporation is responsible both for Milton’s allegedly misleading statements and for other alleged deceptions, all of which falsely portrayed the true state of the company’s business and technology.” And in this case, Milton’s alleged misstatements were attributed to the company even though many of the statements were communicated through Milton’s personal account, not the company’s corporate account. Although, according to the SEC, there were plenty of material misrepresentations in Nikola’s registration statements and other standard communications (i.e., not only alleged misstatements through Milton), the case reinforces the point that fraudulent or misleading statements don’t have to be in a prospectus or 10-K to be actionable—social media will do just fine. The case also highlights the need for companies to take social media into consideration in the context of disclosure controls and procedures, potentially including communications, to the extent that they relate to the company, that are made through personal accounts.
SEC proposes new rules on stock buybacks [updated]
[This post revises and updates my earlier post primarily to reflect the contents of the proposing release.]
At an open meeting last week, the SEC voted three to two to propose new rules regarding company stock repurchases. (At the same time, the SEC also voted unanimously to propose new rules regarding Rule 10b5-1 plans. See this PubCo post.) The amount that companies have spent on stock repurchases has generally increased substantially over the years—in 2020, companies spent almost $700 billion to repurchase their own shares, which, the SEC asserts, “has been accompanied by public interest in corporate payouts in the form of share repurchases.” These repurchases can impact the market, and, the SEC suggests, questions have been raised as to the adequacy of buyback disclosure. The proposal is intended to modernize and improve that disclosure, taking into consideration the academic literature and the SEC’s own analysis, according to the remarks of Corp Fin Director Renee Jones at the open meeting. The proposal would enhance transparency around stock repurchases, including by requiring daily reports of stock repurchases on a new Form SR and expanding the disclosure required regarding repurchases in periodic reports, including a requirement for use of Inline XBRL. According to SEC Chair Gary Gensler, “[s]hare buybacks have become a significant component of how public issuers return capital to shareholders….I think we can lessen the information asymmetries between issuers and investors through enhanced timeliness and granularity of disclosures that today’s proposal would provide.” Dissenting Commissioners Hester Peirce and Elad Roisman seemed to view the proposal as a rulemaking without much of a reason. There is a 45-day comment period after publication in the Federal Register, a time period that Roisman (perhaps taking a cue from Peirce) found to be of insufficient duration.
Happy holidays and happy new year!!
SEC proposes new rules on 10b5-1 plans [updated]
[This post revises and updates my earlier post primarily to reflect the contents of the proposing release.]
At an open meeting last week, the SEC voted—unanimously—to propose new rules regarding Rule 10b5-1 plans. (The SEC also voted three to two to propose new rules regarding issuer stock repurchases. The proposing release on stock buybacks will be discussed in a subsequent post.) Concerns about potential abuse of Rule 10b5-1 plans have been percolating for many years, and the proposal to add new conditions to the use of the Rule 10b5-1 affirmative defense and new disclosure requirements for 10b5-1 plans has long been anticipated. After all, these plans were one of the first rulemaking targets that SEC Chair Gary Gensler identified after he was sworn in as Chair: 10b5-1 plans, he said back in June, “have led to real cracks in our insider trading regime” and called for a proposal to “freshen up” these rules. (See this PubCo post and the SideBar below.) And in the related press release, Gensler again highlighted concerns about “gaps in Rule 10b5-1—gaps that today’s proposals would help fill.” What wasn’t anticipated was that the vote to issue the proposal would be unanimous! (Remember, though, even former SEC Chair Jay Clayton had discussed the need for “good corporate hygiene” in connection with Rule 10b5-1 plans. See this PubCo post.) But how likely is it that this newfound spirit of unanimity will carry forward to adoption? Time will tell. But do the statements on the proposal, discussed below, of Commissioners Hester Peirce and Elad Roisman already give us a preview of issues they might raise in possible future dissents on adoption of the rulemaking? There is a 45-day comment period after publication in the Federal Register, a time period that Roisman (perhaps taking a cue from Peirce) found to be of insufficient duration.
SEC proposes new rules on 10b5-1 plans and stock buybacks
At an open meeting yesterday, the SEC voted to propose new rules addressing trading in the market by insiders and companies. The commissioners voted—unanimously—to propose new rules regarding Rule 10b5-1 plans and voted three to two to propose new rules regarding issuer stock repurchases. The proposal to add new conditions to use of the Rule 10b5-1 affirmative defense and new disclosure requirements for 10b5-1 plans has long been anticipated. After all, these plans were one of the first rulemaking targets that SEC Chair Gary Gensler identified after he was sworn in as Chair: 10b5-1 plans, he said back in June, “have led to real cracks in our insider trading regime” and called for a proposal to “freshen up” these rules. (See this PubCo post.) Yesterday, Gensler again highlighted concerns about “gaps in Rule 10b5-1—gaps that today’s proposals would help fill.” What wasn’t anticipated was that the vote to issue the proposal would be unanimous! (Remember, though, even former SEC Chair Jay Clayton had discussed the need for “good corporate hygiene” in connection with Rule 10b5-1 plans. See this PubCo post.) But how likely is it that this newfound spirit of unanimity will carry forward to adoption? Time will tell. But do the statements on the proposal, discussed below, of Commissioners Hester Peirce and Elad Roisman already give us a preview of issues they might raise in possible future dissents on adoption of the rulemaking? The second proposal, stock buyback disclosure, is designed to enhance transparency around stock repurchases, including by requiring daily reports of stock repurchases on a new Form SR and expanding the disclosure required regarding repurchases in periodic reports, including a requirement for use of Inline XBRL. According to Gensler, “[s]hare buybacks have become a significant component of how public issuers return capital to shareholders….I think we can lessen the information asymmetries between issuers and investors through enhanced timeliness and granularity of disclosures that today’s proposal would provide.” Both Peirce and Roisman seemed to view the proposal as a rulemaking without much of a reason. There is a 45-day comment period after publication in the Federal Register for both of these proposals, a time period that Roisman (perhaps taking a cue from Peirce) found to be of insufficient duration.
SEC offers another packed agenda for Fall 2021
The SEC’s new Fall reg-flex agenda is posted and, no surprise, it’s packed. Here is the short-term agenda and here is the long-term version. And just as with the spring agenda, Commissioners Hester Peirce and Elad Roisman have lambasted it in a dissenting statement. The agenda is laden with major proposals that were on the Spring agenda, but didn’t quite make it out the door, such as plans for disclosure on climate and human capital (including diversity), cybersecurity risk disclosure, Rule 10b5-1, Rule 14a-8 amendments and SPACs, as well as a new, already controversial, proposal to amend the definition of “holders of record.” Some of the agenda items have recently been proposed, for example, new rules regarding mandated electronic filings (see this PubCo post) and amendments to the proxy rules governing proxy voting advice (see this PubCo post). Similarly, three items identified as at the “final rule stage” have already been adopted: universal proxy (see this PubCo post), filing fee disclosure (see this PubCo post) and amendments under the Holding Foreign Companies Accountable Act (see this PubCo post). The agenda also identifies a couple of topics that are still just at the pre-rule stage, such as exempt offerings (updating the financial thresholds in the accredited investor definition, amendments to Rule 701 and amendments to the integration framework). Notably, political spending disclosure is not expressly identified on the agenda (see this PubCo post), nor is there a reference to a comprehensive ESG disclosure framework (see this PubCo post). Below is a selection from the agenda.
Gensler on SPACs: treat like cases alike
What could Aristotle possibly have to say about SPACs? In remarks on Thursday before the Healthy Markets Association, SEC Chair Gary Gensler shared his thoughts on the regulation of SPACs with a theme drawn from antiquity: Aristotle’s maxim that we must “treat like cases alike.” That concept, in Gensler’s view, should apply as finance evolves in response to new technologies and new business models. Take SPACs, for example—a type of transaction that, while not exactly new, has really “taken off in the last couple of years.” A SPAC, he said, is really an alternative method of conducting an IPO. The question addressed by Gensler in his remarks is how “this competitive market innovation [should] be treated under our public policy framework,” in effect, giving us a preview of what we may see in SPAC rulemaking, possibly next year.
ISS releases benchmark policy updates for 2022
This week, ISS issued its benchmark policy updates for 2022. The policy changes will apply to shareholder meetings held on or after February 1, 2022. The key changes for U.S. companies relate to say-on-climate proposals, board diversity, board accountability for climate disclosure by high GHG emitters, board accountability for unequal voting rights and shareholder proposals for racial equity audits, as well as the decidedly less buzzy topics of capital stock authorizations and burn rate methodology in compensation plans.
2021 CPA-Zicklin Index shows steady rise in board oversight and disclosure of political spending
In the aftermath of January 6, a number of companies, highly sensitized to any dissonance or conflict between their public statements or announced core values and their political contributions, determined to pause or discontinue some or all of their political donations. Notwithstanding those actions—or perhaps to some extent because of them—the clamor for disclosure regarding corporate political spending has continued. To that end, in March, Senators Chris Van Hollen and Robert Menendez reintroduced the Shareholder Protection Act of 2021, a bill to mandate not only political spending disclosure, but also shareholder votes to authorize corporate political spending. (See this PubCo post.) The chances that this bill will pass in this Senate? Not great. Nevertheless, even in the absence of legislation, investor pressure and public sentiment may well be having some effect. As shown in the new 2021 CPA-Zicklin Index of Corporate Political Disclosure and Accountability (from the Center for Political Accountability and the Zicklin Center for Business Ethics Research at the Wharton School of the University of Pennsylvania), the number of companies increasing transparency and enhancing board oversight of corporate political spending, whether on their own initiative or prodded by shareholder proposals, is on a gradual but determined rise.
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