Category: Corporate Governance
Cooley Alert: FTC bans noncompetes
The Federal Trade Commission has just voted, three to two, to prohibit post-employment noncompete agreements, with some limited exceptions. The ban will take effect 120 days after the final rule is published in the Federal Register. Why the ban? As discussed in this terrific new Cooley Alert, FTC Passes Sweeping Noncompete Ban, from our Labor and Employment group, the FTC noted that it views non-competes as “unfair method[s] of competition” that “restrict the freedom of American workers, suppress wages, and stifle new business and innovation.” The Alert indicates that the rule has an expansive application: in its definition of noncompetes, the rules sweeps in “certain provisions that are commonly thought to constitute alternatives to noncompetes.” In addition, the rule “broadly applies to noncompete agreements affecting virtually all workers—including employees, independent contractors, externs, interns, volunteers, apprentices or sole proprietors.” Under the rule, employers are required to “issue notices informing affected employees about the cessation of noncompete agreements.”
Cooley Alert—US Supreme Court: Pure Omissions Not Actionable Under Rule 10b-5(b)
Earlier this month, SCOTUS unanimously decided Macquarie Infrastructure Corp v. Moab Partners, holding that a pure omission of information required to be disclosed—in this case required in MD&A under Item 303—cannot form the basis of a private securities fraud action under Rule 10b-5(b). The Court was clear: “Pure omissions are not actionable under Rule 10b–5(b).” To be actionable under Rule 10b-5(b), the Court said, the omission must render an affirmative statement materially misleading. According to the Court, a “pure omission occurs when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.” Actionable “[h]alf-truths, on the other hand, are ‘representations that state the truth only so far as it goes, while omitting critical qualifying information’…….In other words, the difference between a pure omission and a half-truth is the difference between a child not telling his parents he ate a whole cake and telling them he had dessert.” As discussed in this new Cooley Alert, US Supreme Court: Pure Omissions Not Actionable Under Rule 10b-5(b), from our Securities Litigation + Enforcement and Public Companies groups, the “decision emphasizes the importance of assessing whether statements could be construed as being misleading by omission.”
Strine highlights the importance of the “not-sexy” process of board minutes
In an article in the Fordham Journal of Corporate and Financial Law, “Minutes Are Worth the Minutes: Good Documentation Practices Improve Board Deliberations and Reduce Regulatory and Litigation Risk,” former Chief Justice of the Delaware Supreme Court, Leo Strine, discusses—convincingly—the importance of good “corporate minuting and documentation processes.” (See also this post presented on The Harvard Law School Forum on Corporate Governance.) Strine acknowledges upfront that the topic is “decidedly not sexy,” and “the favorite task of no one involved in the process.” Drafting minutes, he suggests, is the “equivalent of eating your least favorite vegetable, either you do it hastily, as infrequently as you can, or, if you can get away with it, not at all.” (Perhaps the leitmotif of this piece might be Strine’s evident hostility to vegetables. Later, he characterizes minutes as “the spinach that must be eaten.”) But, in his view, it is an “unquestionably essential, corporate governance task.” He contends that good quality minutes can reduce litigation risk. And he brings us the receipts, highlighting numerous Delaware cases “where the quality of these practices has determined the outcome of motions and cases,” underscoring the “importance of quality and timely documentation of board decision-making, the material benefits of doing things right, and the considerable downside of sloppy, tardy practices.” But that’s not all. He also invests the documentation process with a larger purpose: he contends that an effective process of crafting and reviewing minutes by the board, together with its counsel and advisors, can serve as an integral part of the board’s deliberative process in arriving at a sound decision based on its considered business judgment. With both of these benefits in mind, the article identifies several effective and efficient practices. Strine offers a lot of wise counsel that readers may want to heed.
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.
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.
Morris Nichols discusses proposed new amendments to the DGCL
You might be interested in this recent Alert from the Delaware firm, Morris Nichols Arsht & Tunnell (including a more expansive article), which addresses amendments to the Delaware General Corporation Law just proposed by the Council of the Corporation Law Section of the Delaware State Bar Association. It’s worth emphasizing that the proposed amendments have not yet been submitted to the Delaware General Assembly for its consideration and approval, so they are not yet effective. As the Alert indicates, the proposed new amendments are designed to address the effects of recent Delaware cases highlighting “that the legal requirements identified in the cases were not necessarily in line with market practice. The Amendments are designed to bring existing law in line with such practice.”
Can director commitments policies help prevent overextended boards?
There is a lot going on at companies, and—you may be surprised to hear—not all of it is new regulation. There are new technologies, such as AI, global political instability and social change, not to mention ESG and cybersecurity. Many of these topics, as they affect a company, fall within the remit of the board for oversight. The energy and time necessary can be overwhelming. In this article, Director Commitments Policies, Overboarding, and Board Refreshment, proxy advisory firm Glass Lewis discusses one way to help ensure that directors have “sufficient time and energy to fulfill their duties and obligations to shareholders”: a director commitments policy. As a corollary, GL maintains, these policies can also serve to boost board refreshment, and can represent a vital measure of corporate governance.
Can companies escape the trap of politics?
We hear a lot about companies taking public positions on political issues—as well as the backlash that many experience as a result. Whether you think corporate participation in politics is a good thing or a bad thing, you might be interested in this thought-provoking paper from the University of Pennsylvania Institute for Law & Economics, How Did Corporations Get Stuck in Politics and Can They Escape?,© by Professors Jill Fisch and Jeff Schwartz (All rights reserved, 2024). In their paper, the authors observe that, while, historically, companies have long engaged in politics and lobbying, something seems quite different today. How? The difference is that companies seem to be taking public positions on any number of hot political issues, even if those issues are not connected to the conduct of their businesses. That is, while companies may take these positions “for business reasons—to appeal to their customers, employees, or investors”—these issues are not necessarily intrinsic to their business operations. The authors contend that this type of corporate behavior, which they call “corporate political posturing,” is “problematic,” creating potential risks for the company, its shareholders and for society. The authors suggest some ways for companies to depoliticize, including through coordinated “voluntary disarmament.” Certainly, some ideas to think about.
New Cooley Alert: “Comparing the SEC Climate Rules to California, EU and ISSB Disclosure Frameworks”
If you’ve been following the developments in climate disclosure regulation, you know that many U.S. companies may well be subject to disclosure regulations beyond those of the SEC; regulations adopted in the European Union, countries outside the EU and in some states, such as California, could be applicable. And some aspects of those regulations are more sweeping—or just different—than those recently adopted by the SEC. For example, the EU employs the concept of “double materiality,” meaning the impacts of companies’ “business on the environment and society irrespective of the positive or negative effect of such impacts on companies’ financials”; by contrast, the SEC looks at materiality from the perspective of the reasonable investor making investment or voting decisions. In light of these and other differences, companies may face challenges in attempting to implement all of the applicable rules. This essential new Cooley Alert, Comparing the SEC Climate Rules to California, EU and ISSB Disclosure Frameworks, from our ESG group provides some welcome guidance in sorting through the requirements of the different frameworks.
Fifth Circuit grants motion for administrative stay of SEC final climate disclosure rules
Is it pencils down already? As has previously been reported, a number of groups have filed petitions in different circuits requesting review of the SEC’s final climate disclosure rules. On March 6, the date of adoption of the final rules, one group, Liberty Energy Inc. and Nomad Proppant Services LLC, petitioned the Fifth Circuit for review of the final rule. On March 8, Petitioners filed a motion asking the Court to issue an administrative stay and a stay pending review of the rule. Yesterday, in a one-sentence order, the Court granted Petitioners’ motion for an administrative stay.
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