Category: Securities
Fix your data tagging!
In this announcement, the SEC’s Office of Structured Disclosure advises that many of us have been tagging our basic and diluted earnings-per-share data incorrectly. The announcement indicates that this data should be tagged using GAAP Financial Reporting taxonomy elements “us-gaap:EarningsPerShareBasic” and “us-gaap:EarningsPerShareDiluted.” That’s true even where the numbers for basic and diluted EPS are the same number and are presented only once on the face of the income statement. In that case, the company “should tag that amount twice using both tags.” Why is this important? Because, according to the announcement, “[i]ncorrect tagging for EPS would negatively impact the usability of the data.” For example, in the case where the company tags the data only once, either the basic or diluted EPS information would be lost.
Exxon persists in battle against Arjuna
When we last checked in on the ExxonMobil litigation against Arjuna Capital, LLC and Follow This—in which Exxon sought a declaratory judgment that it may exclude the two defendants’ proposal from its 2024 annual meeting proxy statement—the Federal District Court for the Northern District of Texas had just dismissed the case against Follow This, an association organized in the Netherlands, for lack of personal jurisdiction, but allowed the case against Arjuna to proceed on the basis of both subject matter and personal jurisdiction. (For background on this case, see this PubCo post.) The two proponents had contended that, because Arjuna and Follow This had withdrawn their proposal and promised not to refile, there was no live case or controversy. As a result, they asserted, Exxon’s claim was moot, and the Court had no subject matter jurisdiction. However, the court held that Exxon had the “winning argument,” citing precedent that “a defendant’s voluntary cessation of a challenged practice does not deprive a federal court of its power to determine the legality of the practice.” According to the court, the “voluntary-cessation doctrine requires more than platitudes to render a case moot;…to moot Exxon’s claim, Defendants must show that it is ‘absolutely clear’ the relevant conduct ‘could not reasonably be expected to recur.’” After the decision was rendered, Arjuna submitted a letter to Exxon in which Arjuna “unconditionally and irrevocably covenants to refrain henceforth from submitting any proposal for consideration by Exxon shareholders relating to GHG or climate change.” End of story? Not quite.
Exxon court challenge to Arjuna shareholder proposal survives dismissal [updated]
You may recall that, in January, ExxonMobil filed a lawsuit against Arjuna Capital, LLC and Follow This, the two proponents of a climate-related shareholder proposal submitted to Exxon, seeking a declaratory judgment that it may exclude their proposal from its 2024 annual meeting proxy statement. Then, the two proponents notified Exxon that they had withdrawn their proposal. End of story? Hardly. In a status update filed in February, Exxon explained that it would not withdraw the complaint because it believed that there was still a critical live controversy for the Court to resolve. Arjuna and Follow This both moved to dismiss the case for lack of personal and subject matter jurisdiction. The Federal District Court for the Northern District of Texas has just issued its opinion: the Court dismissed the case against Follow This, an association organized in the Netherlands, for lack of personal jurisdiction, but the case against Arjuna survives on the basis of both subject matter and personal jurisdiction. Arjuna has now responded by letter. However, this conflict isn’t just about Exxon and two small activist shareholders. It has taken on much larger proportions: some business groups have joined with Exxon to bemoan the “hijacking” by special interest groups of Rule 14a-8 to “advance their preferred social policies” and “inundate public corporations with proposals designed to push ideological agendas.” Others have questioned whether, under the First Amendment, the SEC, through Rule 14a-8, has the right to compel companies to use their proxy statements to speak about contentious political issues. On the other side, some investors lament Exxon’s “aggressive tactics” that threaten to “diminish the role—and the rights—of every investor.” Stay tuned on this one.
Nasdaq proposes rule changes related to phase-ins and cure periods
Nasdaq has proposed to modify some of its corporate governance rules—specifically Rules 5605, 5615 and 5810—to modify the phase-in schedules for the independent director and committee requirements in connection with IPOs, spin-offs and carve-outs, bankruptcy and other specified circumstances and to clarify the applicability of certain cure periods.
Here comes T+1
In 2023, the SEC adopted a number of new rule amendments intended to reduce risks in the clearance and settlement processes, including, significantly, a change that will reduce the standard settlement cycle for most broker-dealer transactions in securities from T+2 to T+1, that is, from two business days after the trade date to one business day. Among other things, the rule changes also shorten the settlement cycle for firm commitment public offerings priced after 4:30 p.m. Eastern Time from T+4 to T+2, unless the parties expressly agree otherwise at the time of the transaction. (See this PubCo post.) According to the press release issued at the time, the final rule was “designed to benefit investors and reduce the credit, market, and liquidity risks in securities transactions faced by market participants.” The compliance date for the rule is now upon us—May 28, 2024. Yep, that’s right after this Memorial Day holiday.
Statement of Corp Fin Director on reporting cybersecurity incidents on Form 8-K
Yesterday, Corp Fin Director Erik Gerding issued a statement designed to clarify the use of Form 8-K Item 1.05 versus Form 8-K Item 8.01 when reporting cybersecurity incidents. Sounds like some of us might be doing it incorrectly—or at least sub-optimally—potentially resulting in investor confusion. Gerding’s statement is designed to set us straight. He also offers a little guidance about making materiality determinations regarding cybersecurity incidents.
Munter and Gerding discuss the need for additional disclosures under IFRS 19
The director of Corp Fin, Erik Gerding, and the SEC Chief Accountant, Paul Munter, have issued a new “Statement on the Application of IFRS 19, Subsidiaries without Public Accountability: Disclosures, in Filings with the SEC.” IFRS 19 permits reporting company subsidiaries “that do not have public accountability” to provide reduced disclosures […]
Professor Coffee tackles the “shadow trading” theory
Here is a great article—no surprise considering its author, Columbia Law Professor John Coffee—that practically gives the last rites to the “shadow trading” theory recently accepted by a federal district court (see this PubCo post) and a jury (see this PubCo post) in SEC v. Panuwat. If, that is, the theory ever reaches the Supreme Court. In Panuwat, the jury in a federal district court in California determined that Matthew Panuwat was civilly liable for insider trading on a set of highly unusual facts under the misappropriation theory—misappropriation of confidential information used to trade in securities in breach of a duty to the source of the information. According to Coffee, prior to Panuwat, cases involving the misappropriation theory “seem to have involved conduct by the defendant that caused ‘likely harm’ to the shareholders of the source of the information.” But not so in Panuwat. Rather than a fiduciary obligation, he suggests, perhaps the duty that Panuwat breached was really a contractual duty owed to his employer? And, in that case, should the SEC be the party enforcing it? His arguments may be highly controversial—certainly the SEC would disagree—but thought-provoking nonetheless and definitely worth a read.
SEC Chief Accountant issues statement on tone at the top
In this statement, SEC Chief Accountant Paul Munter discusses the importance of setting the tone at the top. According to Munter, “academic research has ‘long stressed the crucial role that tone at the top, set by leadership, plays in influencing firm culture and how it is ultimately reflected in the actions and behaviors of [auditors].’ The tone at the top of an audit firm determines whether the culture is focused on delivering high-quality audits or is a profit-center chasing the short-term bottom line, and whether ‘top management extols the important role audits play in the capital markets’ or acts as if audits are little more than compliance ‘commodities.’” Although he talks in terms of auditors, some of Munter’s recommendations may prove useful for companies in establishing their own ethics environments and tone at the top.
Dubious en banc Fifth Circuit hears oral argument on Nasdaq board diversity rules
In August 2021, the SEC approved a Nasdaq proposal for new listing rules regarding board diversity and disclosure, accompanied by a proposal to provide free access to a board recruiting service. The new listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. (See this PubCo post.) It didn’t take long for a court challenge to these rules to materialize: the Alliance for Fair Board Recruitment and, later, the National Center for Public Policy Research petitioned the Fifth Circuit Court of Appeals—the Alliance has its principal place of business in Texas—for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post and this PubCo post) In October 2023, a three-judge panel of the Fifth Circuit denied those petitions, in effect upholding Nasdaq’s board diversity listing rules. Given that, by repute, the Fifth Circuit is the circuit of choice for advocates of conservative causes, the decision to deny the petition may have taken some by surprise—unless, that is, they were aware, as discussed in the WSJ and Reuters, that the three judges on this panel happened to all be appointed by Democrats. Petitioners then filed a petition requesting a rehearing en banc by the Fifth Circuit, where Republican presidents have appointed 12 of the 16 active judges. (See this PubCo post.) Not that politics has anything to do with it, of course. That petition for rehearing en banc was granted, vacating the opinion of the lower court. Yesterday, oral argument was heard. Let’s just say that, while some points were made in support of the rule, the discussion seemed to be dominated by rule skeptics. But the feud between Drake and Kendrick Lamar did figure in the discussion. Some highlights below.
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