Yesterday, without first holding an open meeting, the SEC posted proposals related to changes in beneficial ownership reporting and changes to the whistleblower program. In the press release announcing the changes in beneficial ownership reporting, SEC Chair Gary Gensler described the amendments as an update designed to modernize reporting requirements for today’s markets, including reducing “information asymmetries,” and addressing “the timeliness of Schedule 13D and 13G filings.” Currently, according to Gensler, investors “can withhold market moving information from other shareholders for 10 days after crossing the 5 percent threshold before filing a Schedule 13D, which creates an information asymmetry between these investors and other shareholders. The filing of Schedule 13D can have a material impact on a company’s share price, so it is important that shareholders get that information sooner. The proposed amendments also would clarify when and how certain derivatives acquired with control intent count towards the 5 percent threshold, clarify group formation, and create related exemptions.” The fact sheet indicates that the current deadlines for filing these initial Schedules have not been updated since 1968 (Schedule 13D) and 1977 (Schedule 13G). A lot has changed since the debut of “Hair” on Broadway and the release of “Hey Jude”—but how come platform shoes are still a thing?—so perhaps a reassessment is in order. Here is the fact sheet, and here is the proposing release.
Recent legislation expected to be signed into law by Delaware’s governor amends the state’s General Corporation Law to expressly allow the use of captive insurance companies to fund a Delaware corporation’s directors and officers insurance coverage. What are the implications?
At the beginning of Black history month, in a class action complaint against the NFL and others replete with heart-breaking allegations of racism, former Head Coach of the Miami Dolphins, Brian Flores, charged that, among many other things, he and other members of the proposed class have been denied positions as head coaches and general managers as a result of racial discrimination. Defendants that have responded publicly have reportedly denied the allegations and said that the claims are without merit. Particularly notable from a governance and DEI perspective are allegations regarding the disingenuous application of the vaunted “Rooney Rule”—which originated in the NFL back in 2002 in an effort to address the dearth of Black head coaches—but has since become almost de rigueur in governance circles as one effective approach to increasing diversity in a wide variety of contexts, including boards of directors. However well-intentioned originally, the complaint alleges, “the Rooney Rule is not working.” Flores claims that, to fulfill the admonitions of the Rooney Rule, NFL teams “discriminatorily subjected” him and other Black candidates “to sham and illegitimate interviews due in whole or part to their race and/or color.” While this claim is far from the most incendiary in the complaint, if shown to be accurate, it would certainly seriously damage the reputation of the defendants involved. Can an approach that has allegedly failed to work in its original setting still be made to work effectively in other contexts?
In remarks yesterday before the Northwestern Pritzker School of Law’s Annual Securities Regulation Institute, SEC Chair Gary Gensler addressed cybersecurity under the securities laws. Gensler suggests that the economic cost of cyberattacks could possibly be in the trillions of dollars, taking many forms, including denials-of-service, malware and ransomware. It’s also a national security issue. He reminds us that “cybersecurity is a team sport,” and that the private sector is often on the front lines. Given the frequency of cybersecurity incidents, the SEC is “working to improve the overall cybersecurity posture and resiliency of the financial sector.” To Gensler, the SEC’s cybersecurity policy has three components: “cyber hygiene and preparedness; cyber incident reporting to the government; and in certain circumstances, disclosure to the public.” In his remarks, Gensler considered cybersecurity in a variety of contexts, including SEC registrants in the financial sector, such as broker-dealers, investment companies, registered investment advisers and other market intermediaries; service providers and the SEC itself, but his discussion of cybersecurity in the context of public companies is of most interest here.
For all who admired her greatly—I think that’s just about everyone—and miss seeing her on the Court, especially now with SCOTUS so prominent in our lives, you might want to take a long look through Bonham’s online auction of The Library of Justice Ruth Bader Ginsburg. It’s wonderful and moving just to look through the catalogue, which has lots of photos and text with personal stories accompanying some of the lot descriptions.
In August last year, the SEC announced that it had filed a complaint in the U.S. District Court charging Matthew Panuwat, a former employee of Medivation Inc., an oncology-focused biopharma, with insider trading in advance of Medivation’s announcement that it would be acquired by a big pharma company. But this isn’t your run-of-the-mill insider trading case. Panuwat didn’t trade in shares of Medivation or shares of the acquiror, nor did he tip anyone about the transaction. No, according to the SEC, he engaged in what has been referred to as “shadow trading”; he used the information about his employer’s acquisition to purchase call options on a separate biopharma company, Incyte Corporation, which the SEC claimed was comparable to Medivation. According to the SEC, Panuwat made that purchase based on an assumption that the acquisition of Medivation at a healthy premium would probably boost the share price of Incyte. Incyte’s stock price increased after the sale of Medivation was announced. The SEC charged that Panuwat committed fraud against Medivation in connection with the purchase or sale of securities, with scienter, in violation of Rule 10b-5; he had, the SEC charged, breached his “duty to refrain from using Medivation’s proprietary information for his own personal gain” and traded ahead of the announcement. The SEC sought an injunction and civil penalties. (See this PubCo post.) In November, Panuwat filed a motion to dismiss the complaint under Rule 12(b)(6), calling it “an unprecedented expansion” of the Exchange Act. Last week, the Court denied the motion.
SEC charges company for alleged misstatements regarding director independence and disclosure control failures
As we head into a new proxy season, this SEC order involving settled charges against Leaf Group Ltd. might be a good case to keep in mind. In this case, the SEC charged that Leaf did not adequately identify and analyze—and did not maintain effective disclosure controls and procedures to identify and analyze— whether some of its directors were “independent” and whether there were “interlocking relationships between its directors and executive officers,” which led to “material misstatements and omissions in certain of its public filings,” including its proxy statement. As part of the settlement, Leaf was ordered to pay a civil penalty of $325,000. The company’s alleged failings as outlined in the order might serve to augment your seasonal checklist for examining issues of director independence.
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.
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.