Category: Securities
SCOTUS hears oral argument in Slack direct listing case—did the Court float its likely resolution?
When the SEC was considering the NYSE’s proposal to permit direct listings of primary offerings, one of the frequently raised difficulties related to the potential “vulnerability” of “shareholder legal rights under Section 11 of the Securities Act.” Section 11 provides statutory standing to sue for misstatements in a registration statement to any person acquiring “such security,” historically interpreted to mean a security registered under the specific registration statement. The “vulnerability” was thought to arise as a result of the difficulty plaintiffs may have—in a direct listing where both registered and unregistered shares may be sold at the same time—in “tracing” the shares purchased back to the registration statement in question. In approving adoption of the NYSE rule, the SEC said that it did not “expect any such tracing challenges in this context to be of such magnitude as to render the proposal inconsistent with the Act. We expect judicial precedent on traceability in the direct listing context to continue to evolve,” pointing to Pirani v. Slack Technologies. As the NYSE had observed, only the court in Slack had addressed the issue, and had concluded that, at the pleading stage, plaintiffs could still pursue their claims even if they could not definitively trace the securities they acquired to the registration statement. However, the NYSE noted, the case was on appeal. (See this PubCo post.) The case, Pirani v. Slack Technologies, was decided by a divided three-judge panel of the 9th Circuit, with the court affirming, with one dissent, the district court’s order, ruling that the plaintiff had standing to sue under Section 11. But that decision was appealed to SCOTUS, which granted cert. On Monday, SCOTUS heard oral argument. Justice Kagan may be a bellwether: addressing Pirani’s counsel, she advised that “it does seem to me like you have a hard row to hoe here.” But that was about Section 11. Section 12(a)(2)? Well, that’s another matter.
Lots of shareholder proposals on ESG this proxy season—and quite a few anti-ESG proposals too
Notwithstanding legislative and executive action by several states in opposition to the supposed “woke” stances of some businesses on ESG and ESG investing—or perhaps because of it—this proxy season will see a significant number of shareholder proposals related to ESG. (See this PubCo post and this PubCo post.) As described in the 100+-page Proxy Preview 2023 from the Sustainable Investments Institute, As You Sow and Proxy Impact, there have been 542 ESG-related proposals as of mid-February and the number is “on track to match or exceed last year’s unprecedented final total of 627.” Of course, proponents of shareholder proposals don’t often expect to gain a majority vote—even if they did, the proposals are rarely binding. Rather, the goal is frequently to raise the issue for management and shareholders and hope to secure a substantial enough vote in favor to convince management to take action or, as the WSJ reports, to “create pressure for companies to change [or] to take a position on hot-button issues.” The Preview identified as the two biggest changes for the 2023 proxy season a continued increase in climate change-related proposals and, post-Dobbs, a significant number of proposals related to reproductive health. There has also been an increase in proposals identified as “anti-ESG,” and the Preview expects these proposals to increase, despite “the cool reception they receive.” According to a co-author of the report, “[c]omplex environmental and social challenges are not going away just because they prompt controversy….Proxy season will give companies feedback on reform ideas, but there’s no indication attacks on ESG investing are going to dampen investor appetite for facts and disclosure, which make the capital markets work better.”
Audit committee oversight of non-GAAP financial measures
According to audit firm PwC, non-GAAP financial measures play an important role in financial reporting, “showing a view of the company’s financial or operational results to supplement what is captured in the financial statements,” and help to tell the company’s financial story, as the SEC has advocated in connection with MD&A, “through the eyes of management.” Yet, they also have the potential to open the proverbial can of worms, subjecting the company to serious SEC scrutiny and possible SEC enforcement if misused. Just a couple of weeks ago, the SEC announced settled charges against DXC Technology Company, a multi-national information technology company, for making misleading disclosures about its non-GAAP financial performance. According to the Order, DXC materially increased its reported non-GAAP net income “by negligently misclassifying tens of millions of dollars of expenses ” and improperly excluding them from its reported non-GAAP earnings. In addition to misclassification, DXC allegedly provided a misleading description of the scope of the expenses included in the company’s non-GAAP adjustment and failed to adopt a non-GAAP policy or to have adequate disclosure controls and procedures in place specific to its non-GAAP financial measures. Consequently, DXC “negligently failed to evaluate the company’s non-GAAP disclosures adequately.” DXC agreed to pay a civil penalty of $8 million. (See this PubCo post.) So what can a company’s audit committee do to help prevent the types of problems that have arisen at DXC and elsewhere? Audit committees may find helpful this recent article from PwC providing guidance for committees tasked with oversight of the use of non-GAAP financial measures.
Weaponization of the SEC? The House questions the SEC Chair
Will “weaponization” be Merriam-Webster’s word of the year? On Wednesday, SEC Chair Gary Gensler testified to the House Subcommittee on Financial Services and General Government on the topic of SEC appropriations. The SEC is asking for a 12% increase. Why? Gensler cited tremendous growth in the markets and the “wild west of crypto,” which, he said, without prejudging any one token or exchange, was “rife with non-compliance”; the SEC was stretched thin in its efforts to investigate, but “must be able to meet the match of bad actors.” In response, Gensler heard from some subcommittee members about heavy-handed enforcement, the “blistering pace” of rulemaking (which distracts the SEC from the work some members perceived as its real mission), and capital formation treated as just an afterthought. There was certainly some time spent questioning the vast number of proposals the SEC was making (which Gensler reminded the member was fewer than proposed during Jay Clayton’s tenure) and some attention to staffing issues highlighted in the Inspector General’s report. By far, however, the spotlight was on climate, with much of the subcommittee going on a tear—well, as much of a tear as possible in a five-minute allocation of time—about the SEC’s climate proposal. One member even went so far as to suggest that the climate proposal represented a “weaponization” of the SEC. What impact will these criticisms have on the proposal? (See this PubCo post.)
Sustainability reports—not a liability-free zone
In April of last year, as described in this press release, the SEC filed a complaint against Vale S.A., a publicly traded (NYSE) Brazilian mining company and one of the world’s largest iron ore producers, charging that it made “false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam. The collapse killed 270 people, caused immeasurable environmental and social harm, and led to a loss of more than $4 billion in Vale’s market capitalization.” The SEC alleged that Vale “fraudulently assured investors that the company adhered to the ‘strictest international practices’ in evaluating dam safety and that 100 percent of its dams were certified to be in stable condition.” Significantly, these statements were contained, not just in Vale’s SEC filings, but also, in large part, in its sustainability reports. In discussing the charges, the press release made reference to the SEC’s Climate and ESG Task Force formed in 2021 in the Division of Enforcement “with a mandate to identify material gaps or misstatements in issuers’ ESG disclosures, like the false and misleading claims made by Vale.” On Tuesday, the SEC announced that Vale had agreed to pay $55.9 million to settle the SEC charges. According to the Associate Director of Enforcement, the SEC’s “action against Vale illustrates the interplay between the company’s sustainability reports and its obligations under the federal securities law….The terms of today’s settlement, if approved by the court, will levy a significant financial penalty against Vale and demonstrate that public companies can and should be held accountable for material misrepresentations in their ESG-related disclosures, just as they would for any other material misrepresentations.”
What have studies shown so far about PvP disclosure?
In August last year—12 years after the Dodd-Frank mandate— the SEC finally adopted a new rule that requires disclosure of information reflecting the relationship between executive compensation actually paid by a company and the company’s financial performance: the pay-versus-performance rules. To a significant extent, the approach taken by the SEC in this rulemaking was prescriptive and some of the prescriptive aspects of the rules were quite complex; the SEC opted not to take a “wholly principles-based approach because, among other reasons, such a route would limit comparability across issuers and within issuers’ filings over time, as well as increasing the possibility that some issuers would choose to report only the most favorable information.” But there was some flexibility built into the new rules. How would companies implement the more flexible disclosure requirements? That was the question considered by Compensation Advisory Partners, which published a report on the versions of pay-versus-performance disclosure from the earliest filers among the S&P 500. A similar study of a slightly larger group was conducted by equitymethods. The goal in each case was to try to get a sense of how companies were responding to the new disclosure requirements. What choices were companies making on peer groups, financial measures or “Company-Selected Measures”? How were companies describing the relationship between pay and performance? Just what did the new disclosure look like?
SEC Chief Accountant has advice for audit committees on lead auditors’ use of other auditors
In this new statement, SEC Chief Accountant Paul Munter—no longer “acting” Chief, he got the job—discusses some of the issues arising out of the increased use by lead auditors of other accounting firms and individual accountants (referred to as “other auditors”) on many issuer audit engagements. While, in this context, much of the responsibility falls on the lead auditors, audit committees also have an important oversight role, and Munter has some useful advice for audit committee members.
Corp Fin posts update to tender offer CDIs
Corp Fin has posted an update to the CDIs related to the tender offer rules and schedules. Below are brief summaries.
Gensler remarks on market stability
In remarks at an open meeting of the SEC this week (focused on proposals related to cybersecurity and data protection in the markets), SEC Chair Gary Gensler’s opening remarks addressed the bank failures of last week in the context of enforcement and market stability.
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