Category: Litigation
New challenge to California board diversity laws
There’s a new case challenging both of California’s board diversity laws. The case, , Alliance for Fair Board Recruitment v. Weber, which was filed in a California federal district court against the California Secretary of State, Dr. Shirley Weber, seeks declaratory relief that California’s board diversity statutes (SB 826 and AB 979) violate the Equal Protection Clause of the 14th Amendment and the internal affairs doctrine, and seeks to enjoin Weber from enforcing those statutes. The plaintiff, the Alliance for Fair Board Recruitment, is described as “a Texas non-profit membership association,” with members that include “persons who are seeking employment as corporate directors as well as shareholders of publicly traded companies headquartered in California and therefore subject to SB 826 and AB 979.” Will this case be the one to jettison these two statutes?
SEC charges misleading claims and inadequate due diligence in SPAC transaction
The SEC has announced charges against Stable Road Acquisition Corp. (a SPAC), SRC-NI (its sponsor), Brian Kabot (its CEO), Momentus, Inc. (the SPAC’s proposed merger target), and Mikhail Kokorich (Momentus’s founder and former CEO) for misleading claims about Momentus’s technology and about national security risks associated with Kokorich. All the parties have settled other than Kokorich, against whom the SEC has filed a separate complaint. Under the Order, the settling parties agreed to aggregate penalties of over $8 million and voluminous, specific investor protection undertakings. The SPAC sponsor also agreed to forfeit the founder’s shares that it would otherwise have received if the merger were approved. The merger vote is currently scheduled for August 2021. SEC Chair Gary Gensler weighed in—a rare comment on a litigation settlement, perhaps signaling the significance of the case: “This case illustrates risks inherent to SPAC transactions, as those who stand to earn significant profits from a SPAC merger may conduct inadequate due diligence and mislead investors….Stable Road, a SPAC, and its merger target, Momentus, both misled the investing public. The fact that Momentus lied to Stable Road does not absolve Stable Road of its failure to undertake adequate due diligence to protect shareholders. Today’s actions will prevent the wrongdoers from benefitting at the expense of investors and help to better align the incentives of parties to a SPAC transaction with those of investors relying on truthful information to make investment decisions.”
What’s happening with the shareholder proposal for mandatory arbitration bylaws?
In 2018, a Harvard law professor submitted (on behalf of a related trust/shareholder) a shareholder proposal to Johnson & Johnson requesting that the board adopt a mandatory arbitration bylaw. After receiving a no-action letter from Corp Fin, J&J excluded the proposal, and the professor then sued J&J. A decision has just been rendered dismissing the complaint. But that’s not necessarily the end of the shareholder’s proposal to J&J for mandatory arbitration.
Can hypothetical risk factors be misleading?
In In re Alphabet Securities Litigation., the State of Rhode Island, as lead plaintiff, filed a Rule10b-5 action against Google LLC, its holding company Alphabet, Inc., and certain executives, alleging that the defendants failed to timely disclose certain cybersecurity defects and vulnerabilities. The district court granted defendants’ motion to dismiss the complaint, but on appeal, a three-judge panel of the 9th Circuit reversed in part, holding that the complaint “plausibly alleged” that the decision to omit information about these cybersecurity vulnerabilities “significantly altered the total mix of information available for decision-making by a reasonable investor” and that scienter—intent to deceive, manipulate or defraud—was adequately alleged. Importantly, the Court held that the complaint contained a plausible allegation that Alphabet’s omission was materially misleading: its risk factor discussion of cybersecurity was framed in the hypothetical, while, it was alleged, the “hypothetical” events had in fact already come to fruition. The case serves as a reminder of a couple of now-familiar themes: companies need to regularly review their risk factor disclosures, even when—or perhaps especially when—they are incorporating them by reference to ensure that they have been appropriately updated to reflect actual events that may have made the risks described as merely hypothetical no longer so. It’s also notable that this case represents the second recent instance of allegations of failure to disclose the discovery of a material cybersecurity “vulnerability”—in the absence of a cyberattack—with disclosure ultimately compelled by the publication of an article exposing the defects. It’s another reminder that companies need to be vigilant for potential disclosure obligations about cybersecurity that might arise outside the context of cyberattacks and hacks—in the more-difficult-to-assess context of cybersecurity vulnerabilities.
Ninth Circuit allows challenge to California board gender diversity statute to go forward
In Meland v. Padilla, a shareholder of a publicly traded company filed suit in federal district court seeking a declaratory judgment that SB 826, California’s board gender diversity statute, was unconstitutional under the equal protection provisions of the 14th Amendment. In April 2020, a federal judge dismissed that legal challenge on the basis of lack of standing. On Monday, a three-judge panel of the 9th Circuit reversed that decision, allowing the case, now called Meland v. Weber, to go forward. The Court held that, because the plaintiff “plausibly alleged that SB 826 requires or encourages him to discriminate on the basis of sex, he has adequately alleged that he has standing to challenge SB 826’s constitutionality.”
Lots to see on the SEC’s Spring 2021 Reg Flex Agenda
Late Friday, the SEC announced that its Spring 2021 Regulatory Flexibility Agenda—both short-term and long-term—has now been posted. And it’s a doozy. According to SEC Chair Gary Gensler, to meet the SEC’s “mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, the SEC has a lot of regulatory work ahead of us.” That’s certainly an understatement. While former SEC Chair Jay Clayton considered the short-term agenda to signify rulemakings that the SEC actually planned to pursue in the following 12 months, Gensler may be operating under a different clock. What stands out here are plans for disclosure on climate and human capital (including diversity), cybersecurity risk disclosure, Rule 10b5-1, universal proxy and SPACs. In addition, with a new sheriff in town, some of the SEC’s more recent controversial rulemakings of the last year or so may be revisited, such as Rule 14a-8. The agenda also identifies a few topics that are still just at the pre-rule stage—i.e., just a twinkle in someone’s eye—such as gamification (behavioral prompts, predictive analytics and differential marketing) and exempt offerings (updating the financial thresholds in the accredited investor definition and amendments to the integration framework). Notably, political spending disclosure is not expressly identified on the agenda, nor is there a reference to a comprehensive ESG disclosure framework (see this PubCo post). Below is a selection from the agenda.
Gensler plans to “freshen up” Rule 10b5-1
Yesterday, in remarks before the WSJ’s CFO Network Summit, SEC Chair Gary Gensler scooped the Summit with news of plans to address issues he and others have identified in Rule 10b5-1 plans. Problems with 10b5-1 plans have long been recognized—including by former SEC Chair Jay Clayton—so it will be interesting to see if any proposal that emerges will find support among the Commissioners on both sides of the SEC’s aisle. In an interview, Gensler also responded to questions about climate disclosure rules, removal of the PCAOB Chair, Enforcement, SPACs and other matters.
Why event-driven securities litigation has become a thing—and a lucrative one too
If Matt Levine has a mantra in his “Money Stuff” column on Bloomberg, it’s this: everything is securities fraud. “You know the basic idea,” he often says in his most acerbic voice,
“A company does something bad, or something bad happens to it. Its stock price goes down, because of the bad thing. Shareholders sue: Doing the bad thing and not immediately telling shareholders about it, the shareholders say, is securities fraud. Even if the company does immediately tell shareholders about the bad thing, which is not particularly common, the shareholders might sue, claiming that the company failed to disclose the conditions and vulnerabilities that allowed the bad thing to happen. And so contributing to global warming is securities fraud, and sexual harassment by executives is securities fraud, and customer data breaches are securities fraud, and mistreating killer whales is securities fraud, and whatever else you’ve got. Securities fraud is a universal regulatory regime; anything bad that is done by or happens to a public company is also securities fraud, and it is often easier to punish the bad thing as securities fraud than it is to regulate it directly.” (Money Stuff, 6/26/19)
(See this PubCo post.) But should everything really be securities fraud? An interesting new paper examines the phenomenon.
House passes Insider Trading Prohibition Act—will it pass the Senate?
On Tuesday, the Insider Trading Prohibition Act passed the house by a pretty big bipartisan majority—350 to 75. Currently, there is no explicit statutory prohibition on insider trading and prosecutors have relied on general fraud statutes to pursue charges. The bill would add to the Exchange Act a new Section 16A that would define insider trading and make it illegal. In an interview with Reuters, the bill’s sponsor, Jim Himes, said that “the legislation does not expand insider trading law but simpli?es and codi?es the law as articulated by courts through decades of opinions.” A version of the bill passed the House in 2019 by an even stronger vote, but never made it through the Republican-led Senate. No,w with Democrats in charge, will the bill be passed and signed into law?
Under Armour’s failure to disclose order “pull forwards” comes under fire at the SEC
On Monday, the SEC announced settled charges against Under Armour, Inc., a manufacturer of sports apparel, for misleading investors by failing to disclose material information about its “revenue management practices.” According to the Order, Under Armour had established a reputation for consistent revenue growth that exceeded analysts’ consensus estimates. But when internal forecasts began to indicate that it would miss those estimates, the company sought to close the gap by accelerating—“pulling forward”—existing orders that had been scheduled by customers for future quarters. Although this practice continued for six quarters, the SEC charged, the company failed to disclose this pull-forward practice as a driver of its revenue growth nor did it disclose the “known uncertainty” that this practice created with regard to revenues in future quarters. It’s worth noting that the SEC’s charges related solely to disclosure failures; the Order expressly indicated that the SEC did “not make any findings that revenue from these sales was not recorded in accordance with [GAAP].” Under Armour agreed to pay $9 million to settle the action.
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