Category: Securities
SEC’s Small Business Capital Formation Advisory Committee discusses climate disclosure and SPAC proposals
On Friday, the SEC’s Small Business Capital Formation Advisory Committee held a virtual meeting to discuss two of the SEC’s recent rulemaking initiatives: climate disclosure and SPACs, particularly as those proposals, if adopted, would impact smaller public companies and companies about to go public. The committee heard several presentations, including summaries of the proposals from SEC staff members, and voiced concerns about a number of challenges presented by the proposals. The committee also considered potential recommendations that it expects to make to the SEC.
Corp Fin posts sample comments related to Ukraine disclosure
Corp Fin has posted a sample comment letter to companies about potential disclosure obligations arising out of the Russian invasion of Ukraine, the international response to it and related supply chain issues. Corp Fin wants companies to provide more “detailed disclosure, to the extent material or otherwise required,” about the direct or indirect impact on their businesses of their exposure to or business relationships with Russia, Belarus or Ukraine, any goods or services sourced in those countries and supply chain disruption. The letter provides a useful resource to help companies think through how their businesses have been or may be affectedCorp Fin has posted a sample comment letter to companies about potential disclosure obligations arising out of the Russian invasion of Ukraine, the international response to it and related supply chain issues. Corp Fin wants companies to provide more “detailed disclosure, to the extent material or otherwise required,” about the direct or indirect impact on their businesses of their exposure to or business relationships with Russia, Belarus or Ukraine, any goods or services sourced in those countries and supply chain disruption. The letter provides a useful resource to help companies think through how their businesses have been or may be affected, even if they don’t have operations in Russia or Ukraine.
California appellate court upholds enforceability of exclusive federal forum provision
In Salzberg v. Sciabacucchi (pronounced Shabacookie), the Delaware Supreme Court unanimously held that charter provisions designating the federal courts as the exclusive forum for ’33 Act claims were “facially valid.” (See this PubCo post.) Given that Sciabacucchi involved a facial challenge, the Supreme Court had viewed the question of enforceability as a “separate, subsequent analysis” that depended “on the manner in which it was adopted and the circumstances under which it [is] invoked.” With regard to the question of enforceability of exclusive federal forum provisions if challenged in the courts of other states, the Delaware Supreme Court said that there were “persuasive arguments,” such as due process and the need for uniformity and predictability, that “could be made to our sister states that a provision in a Delaware corporation’s certificate of incorporation requiring Section 11 claims to be brought in a federal court does not offend principles of horizontal sovereignty,” and should be enforced. But would they be? Following Sciabacucchi, in light of the perceived benefits for defendants of litigating Securities Act claims in federal court, many Delaware companies that did not have FFPs adopted them, and companies with FFPs involved in ’33 Act litigation tried to enforce them by moving to dismiss state court actions. In 2020, in an apparent case of first impression, Wong v. Restoration Robotics, the San Mateo Superior Court in California upheld application of the FFP, declining “jurisdiction over the claims alleged against Restoration Robotics and its officers and directors only, pursuant to the FFP.” (See this PubCo post.) Plaintiff appealed. The California Court of Appeal, First Appellate District, has just affirmed the lower court’s decision, upholding enforcement of the FFP.
After dam collapse, SEC alleges false safety claims in sustainability reports and SEC filings
As described in this press release, the SEC has 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. According to Gurbir Grewal, Director of Enforcement, “[m]any investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions….By allegedly manipulating those disclosures, Vale compounded the social and environmental harm caused by the Brumadinho dam’s tragic collapse and undermined investors’ ability to evaluate the risks posed by Vale’s securities.” Notably, the press release refers to the SEC’s Climate and ESG Task Force formed last year 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.” The SEC’s charges arising out of this horrific accident are a version of “event-driven” securities litigation—brought this time, not by shareholders, but by the SEC.
Is the SEC process for SPAC registration statements Kafkaesque?
“Statement Regarding SPAC Matter,” is the latest from SEC Commissioner Hester Peirce. Seems completely anodyne, doesn’t it? But, as they say, looks can be deceiving. Instead, it’s a withering criticism of the SEC’s failure to declare a SPAC registration statement effective in time to allow a de-SPAC merger to go forward, implicitly suggesting at the end that the SEC may have displayed a lack of good faith in its Kafkaesque process (her metaphor, not mine), which had the effect of stringing the registrant along for many months until it was too late to go forward and liquidation was the only possible result. Peirce presumes the failure to declare effectiveness was based on the SEC’s “newfound hostility to SPAC capital formation.” Of course, as none of the correspondence with the SEC has been posted, we really have no independent information about what happened or precisely why the registration statement was not declared effective; it’s certainly possible that the deal was more thorny than the norm. Peirce calls SEC “inaction on a request for acceleration of the effective date of a registration statement…highly unusual.” But then, so is her statement.
Raiding the cookie jar—“part of the art of the close”?
In this Order, the SEC brought settled charges against Rollins, Inc., a termite and pest control company—think “Orkin”—and its former CFO for earnings management. In essence, the SEC alleged that the company adjusted the amounts in several of its corporate reserves, without support or documentation, to bump up its EPS so that its EPS would meet analysts’ consensus EPS estimates for two quarters. The company would otherwise have missed those consensus estimates by a penny in each quarter. The SEC charged the company with securities fraud under the Securities Act, financial reporting violations under the Exchange Act and failure to maintain adequate internal accounting controls and imposed a civil penalty of $8 million. The CFO was also charged with similar violations and ordered to pay a civil penalty of $100,000. According to Gurbir Grewal, Director of Enforcement, “[t]his is the fourth action and the highest penalty to date against an issuer in connection with the Division of Enforcement’s highly successful and continuing EPS Initiative, which uses data analytics to uncover hard-to-detect accounting and disclosure violations by public companies….The SEC staff’s ever-increasing sophistication with data made today’s action possible and underscores that we will continue to pursue public companies that lack adequate accounting controls and engage in improper earnings management practices.”
Is the SEC’s new climate proposal within the traditions of the SEC disclosure regime?
Earlier this week, SEC Chair Gary Gensler gave the keynote address for an investor briefing on the SEC Climate Disclosure Rule presented by nonprofit Ceres. In his remarks, entitled “Building Upon a Long Tradition,” Gensler vigorously pressed his case that the SEC’s new climate disclosure proposal (see this PubCo post, this PubCo post and this PubCo post) was comfortably part of the conventional tapestry of SEC rulemaking. Growing out of the core bargain of the 1930s that let investors “decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures,” Gensler observed, the SEC’s disclosure regime has continually expanded—adding disclosure requirements about financial performance, MD&A, management, executive comp and risk factors. Over the generations, the SEC has “stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions.” As has been the case historically, the SEC, he insisted, “has a role to play in terms of bringing some standardization to the conversation happening between issuers and investors, particularly when it comes to disclosures that are material to investors.” The proposed rules, he said, “would build on that long tradition.” But has everyone bought into that view?
Audit Analytics reports on cybersecurity disclosure
These days, with our government warning regularly about the likelihood of breaches in cybersecurity, concerns about cyber threats have only multiplied. Introducing the SEC’s new proposal for cybersecurity disclosure in March (see this PubCo post), SEC Corp Fin Director Renee Jones said that, in today’s digitally connected world, cyber threats and incidents pose an ongoing and escalating threat to public companies and their shareholders. In light of the pandemic-driven trend to work from home and, even more seriously, the potential impact of horrific global events, cybersecurity risk is affecting just about all reporting companies, she continued. While threats have increased in number and complexity, Jones said, currently, company disclosure about cybersecurity is not always decision-useful and is often inconsistent, not timely and sometimes hard for investors to locate. What’s more, some material incidents may not be reported at all. Audit Analytics has just posted a new report regarding trends in cybersecurity incident disclosures. The report indicates that, in 2021, there was a 44% increase in the number of breaches disclosed, from 131 in 2020 to 188 in 2021, the most breaches disclosed in a single year since 2011. And, since 2011, the number of cybersecurity incidents disclosed annually has increased nearly 600%. Interestingly, however, in 2021, only 43% of cybersecurity incidents were disclosed in SEC filings, the report said.
SEC extends comment period for climate disclosure proposal
Yesterday, the SEC announced that it had extended or reopened the public comment period on three proposals, including the proposed rulemaking to enhance and standardize climate-related disclosures. (See this PubCo post, this PubCo post and this PubCo post.) The comment period was originally scheduled to close on May 20, 2022, but will now be extended until June 17, 2022. (And rumor has it that the SEC will often accept comments submitted within a reasonable time after the deadline.) According to SEC Chair Gary Gensler, the proposal had “drawn significant interest from a wide breadth of investors, issuers, market participants, and other stakeholders….Commenters with diverse views have noted that they would benefit from additional time to review these three proposals, and I’m pleased that the public will have additional time to provide thoughtful feedback.” For example, in April, 36 trade and industry associations asked the SEC to provide a 180-day comment period, contending that, “given the size, scope, complexity, and ramifications of the rule,“ the time period allowed for comment was “woefully inadequate for the magnitude of this rule, which runs to 506 pages, contains 1,068 footnotes, references 194 dense academic and governmental reports, imposes a $10.235 billion cost on society, and seeks answers to 196 discrete questions.“ While the extension will certainly be welcome, will it be considered sufficient?