Category: Litigation
Starbucks decision to adopt DEI initiative within Board’s business judgment
In August last year, the National Center for Public Policy Research filed a complaint against Starbucks and its officers and directors, National Center for Public Policy Research v. Schultz, alleging that they caused Starbucks to adopt a group of policies that discriminate based on race in violation of a “wide array of state and federal civil rights laws.” Starbucks characterized the policies as designed to “realize its ‘commitment to Inclusion, Diversity, and Equity[.]’” Starbucks, its officers and directors moved to dismiss, and a hearing on the motion was held on August 11, 2023. At the hearing, the Federal District Court for the Eastern District of Washington granted the motion to dismiss with prejudice and closed the case. A month on, the Court’s Order has now been released. While the Order discusses the various legal bases for the dismissal, the Court’s sentiment was perhaps best summed up by its statement in the Order that “[t]his Complaint has no business being before this Court and resembles nothing more than a political platform.” Much like the recent decision of the Delaware Chancery Court in Simeone v. The Walt Disney Company, the Court concluded that “[c]ourts of law have no business involving themselves with reasonable and legal decisions made by the board of directors of public corporations.” Are we starting to see a trend with regard to board business decisions about corporate social policy?
SEC charges Fluor with improper accounting and inadequate internal accounting controls
In this Order, the SEC brought settled charges against Fluor Corporation, a global engineering, procurement and construction company listed on the NYSE, in connection with alleged improper accounting on two large-scale, fixed-price construction projects. Five current and former Fluor officers and employees were also charged. (The press release includes links to the orders for the five individuals.) Fixed-price contracts mean that cost overruns are the contractor’s problem, not the customer’s, and Fluor’s bids on the two projects were based on “overly optimistic cost and timing estimates.” When Fluor experienced cost overruns, the SEC alleged, Fluor’s internal accounting controls failed, with the result that Fluor used improper accounting for these projects that did not comply with the percentage-of-completion accounting method under GAAP, leading Fluor to materially overstate its net earnings for several annual and quarterly periods. A restatement ultimately followed. Fluor agreed to pay a civil penalty of $14.5 million and the officers to pay civil penalties between $15,000 and $25,000. According to the Associate Director in the Division of Enforcement, “[d]ependable estimates and the internal accounting controls that facilitate them are the backbone of percentage of completion accounting and are critical to the accuracy of the financial statements that investors rely on….We will continue to hold companies and individuals accountable for serious controls failures and resulting recordkeeping and reporting violations.”
Are springing penalties a thing? SEC charges Plug Power with accounting, reporting and control failures
In this Order, the SEC brought settled charges against Plug Power, Inc., a provider of green hydrogen and hydrogen-fuel-cell solutions, for financial reporting, accounting and controls failures in connection with a variety of the Company’s complex business transactions. The failures required Plug to restate its financial statements for several years. In the restatement, Company management identified a material weakness in internal control over financial reporting and ineffective disclosure controls and procedures, allegedly “due to Plug Power’s failure to maintain a sufficient complement of trained, knowledgeable personnel to execute their responsibilities for certain financial statement accounts and disclosures. Despite these control deficiencies, the Company raised over $5 billion from investors during the relevant Filing Period.” According to the SEC, Plug’s “material weakness in ICFR and ineffective DCP have not been fully remediated,” and the Company is continuing its remediation efforts. Plug agreed to pay a civil penalty of $1.25 million and to implement a number of undertakings, including an undertaking “to fully remediate the Company’s material weakness in ICFR and ineffective DCP within one year” of the SEC’s Order. Should Plug fail to comply with those undertakings, the Company will be required to pay a “springing penalty,” an additional civil penalty of $5 million.
Will the SEC beat the clock on the Gensler agenda?
In an article in 2022, Politico reported that SEC Chair Gary “Gensler has come under fire for the pace of rulemaking coming out of the agency, with critics claiming that dissecting the flood of new proposals in such short periods of time is impractical. Gensler has pointed out that the number of proposals [is] largely on par with what former SEC chairs like Clayton have done. The latest proposals have just been more clustered than in the past, Gensler said.” That’s a response that I’m sure I’ve heard any number of times during Congressional hearings. Is that still the case? To find out, Bloomberg performed a count of SEC records from 2001 to 2023 to assess the extent of rulemaking in the first two years, four months and one week into the tenures of several of the SEC Chairs over that period who were confirmed to lead the SEC at the start of a new administration. The answer? Yes and no. According to Bloomberg, the “SEC under Chair Gary Gensler is issuing regulations at its slowest pace in decades for a new presidential administration,” having adopted just 22 final rules since his tenure began in 2021. By comparison, over the same periods, the SEC under Jay Clayton had adopted 25 final rules, under Mary Schapiro, 28 rules, and under Harvey Pitt, a whopping 34 rules (many implementing the SOX mandate). So were all the complaints about the tsunami of rulemaking just misguided? Not exactly. As Bloomberg notes, “[d]espite trailing his recent predecessors on final rules, Gensler’s proposal tally of 49 exceeds Clayton’s 28 and Pitt’s 48, but is less than Schapiro’s 65.” [Emphasis added.] For the agenda of the Gensler administration, that leaves quite a chasm at this point between rules that are final and rules that are just proposed. What might that mean for SEC priorities? Bloomberg takes a deep dive.
You might want to think twice before describing pending litigation as “without merit”
There’s definitely a lesson to be learned from this recent case from the Massachusetts Federal District Court, City of Fort Lauderdale Police & Firefighters’ Ret. Sys. v. Pegasystems Inc.: companies making public statements about pending litigation should be very cautious when characterizing their views on the merits or prospects of that litigation. There may well be occasions when describing litigation as “without merit” may be, well, merited. But companies should keep in mind that claiming that a complaint against the company is “without merit”—as companies often do—may just shake up a whole new hornets’ nest, as it did in this case. (Hat tip to The 10b-5 Daily.)
SEC finds Forms 12b-25 not up to snuff
Earlier this week, the SEC announced settled enforcement actions against five companies for deficient disclosure in Forms 12b-25 that they filed regarding late reports. Why? On the heels of filing those Forms 12b-25, the companies announced financial restatements or corrections that were not even alluded to in those late notification filings. Over two years ago, the SEC charged eight companies for similar violations detected through the use of data analytics in an initiative aimed at Form 12b-25 filings that were soon followed by announcements of financial restatements or corrections. (See this PubCo post.) Apparently, the SEC believes that companies are still flubbing this one and does not seem to consider these errors to be just harmless foot faults. In connection with the 2021 enforcement actions, the Associate Director of Enforcement hit on a central problem from the SEC’s perspective with deficiencies of this type: “In these cases, due to the companies’ failure to include required disclosure in their Form 12b-25, investors relying on the deficient Forms NT were kept in the dark regarding the unreliability of the company’s financial reporting or anticipated material changes in operating results.” These charges should serve as a reminder that completing the late notification is not, to borrow a phrase, a trivial pursuit and could necessitate substantial time and attention to provide the narrative and quantitative data that, depending on the circumstances, could be required.
In Fifth Circuit oral argument, SEC faces challenge to preserve 2022 changes to proxy advisor rules
In December last year, the Federal District Court for the Western District of Texas issued an Order granting summary judgment to the SEC and Chair Gary Gensler and denying summary judgment to the National Association of Manufacturers and the Natural Gas Services Group in the litigation surrounding the SEC’s adoption in 2022 of amendments to the rules regarding proxy advisory firms, such as ISS and Glass Lewis. Those 2022 rules reversed some of the key controversial provisions governing proxy voting advice that were adopted by the SEC in July 2020 and favored by NAM. NAM’s complaint, filed in July last year, had asked that the 2022 rules be set aside under the Administrative Procedure Act and declared unlawful and void, and, in September, NAM filed its motion for summary judgment, characterizing the case as “a study in capricious agency action.” The District Court begged to differ, and NAM appealed. This week, a three-judge panel of the Fifth Circuit heard oral argument on NAM’s appeal. Let’s just say that the Court didn’t appear to be particularly sympathetic to the SEC’s case, with Judge Edith Jones mocking the SEC’s concern with the purported burdens on proxy advisors as “pearl-clutching.”
Federal district court upholds forum selection provision for claims under Section 10(b)
You probably remember the 2020 major cyberattack—reportedly perpetrated by a foreign government—of SolarWinds, a Delaware public company that “provides software products used to monitor the health and performance of information-technology networks.” The hack of the company’s software systems affected thousands of clients, including several government agencies. After the company disclosed the cyberattack, its stock price plummeted. Litigation ensued. One of the cases, Sobel v. Thompson, brought in a Texas federal district court, was a derivative lawsuit in which the plaintiff stockholder claimed, on behalf of the company, that the company’s officers and directors failed to disclose known cybersecurity deficiencies in the company’s periodic and other reporting prior to the cyberattack—a case under Exchange Act Section 10(b). The defendants moved to dismiss the case on the basis of forum non conveniens. Why? Because the company’s charter included a forum-selection provision making the Delaware Chancery Court the exclusive forum for derivative litigation. The Court dismissed the case, notwithstanding the plaintiff’s contention that, in light of the federal courts’ exclusive jurisdiction over Exchange Act claims, enforcement of the charter provision would effectively preclude him from bringing his derivative Exchange Act claims in any forum. We have previously seen cases addressing enforcement of Delaware forum-selection clauses in the context of claims regarding allegedly false or misleading proxy statement disclosures under section 14(a), and there, the circuits are split. Per Alison Frankel’s piece in Reuters, this case may be novel in that it addresses the application of a forum-selection provision in the context of claims under Section 10(b). Will this case—and, should it be widely followed, others like it—effectively put the kibosh on derivative Section 10(b) claims?
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