Cooley Alert—US Supreme Court: Pure Omissions Not Actionable Under Rule 10b-5(b)
Earlier this month, SCOTUS unanimously decided Macquarie Infrastructure Corp v. Moab Partners, holding that a pure omission of information required to be disclosed—in this case required in MD&A under Item 303—cannot form the basis of a private securities fraud action under Rule 10b-5(b). The Court was clear: “Pure omissions are not actionable under Rule 10b–5(b).” To be actionable under Rule 10b-5(b), the Court said, the omission must render an affirmative statement materially misleading. According to the Court, a “pure omission occurs when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.” Actionable “[h]alf-truths, on the other hand, are ‘representations that state the truth only so far as it goes, while omitting critical qualifying information’…….In other words, the difference between a pure omission and a half-truth is the difference between a child not telling his parents he ate a whole cake and telling them he had dessert.” As discussed in this new Cooley Alert, US Supreme Court: Pure Omissions Not Actionable Under Rule 10b-5(b), from our Securities Litigation + Enforcement and Public Companies groups, the “decision emphasizes the importance of assessing whether statements could be construed as being misleading by omission.”
Strine highlights the importance of the “not-sexy” process of board minutes
In an article in the Fordham Journal of Corporate and Financial Law, “Minutes Are Worth the Minutes: Good Documentation Practices Improve Board Deliberations and Reduce Regulatory and Litigation Risk,” former Chief Justice of the Delaware Supreme Court, Leo Strine, discusses—convincingly—the importance of good “corporate minuting and documentation processes.” (See also this post presented on The Harvard Law School Forum on Corporate Governance.) Strine acknowledges upfront that the topic is “decidedly not sexy,” and “the favorite task of no one involved in the process.” Drafting minutes, he suggests, is the “equivalent of eating your least favorite vegetable, either you do it hastily, as infrequently as you can, or, if you can get away with it, not at all.” (Perhaps the leitmotif of this piece might be Strine’s evident hostility to vegetables. Later, he characterizes minutes as “the spinach that must be eaten.”) But, in his view, it is an “unquestionably essential, corporate governance task.” He contends that good quality minutes can reduce litigation risk. And he brings us the receipts, highlighting numerous Delaware cases “where the quality of these practices has determined the outcome of motions and cases,” underscoring the “importance of quality and timely documentation of board decision-making, the material benefits of doing things right, and the considerable downside of sloppy, tardy practices.” But that’s not all. He also invests the documentation process with a larger purpose: he contends that an effective process of crafting and reviewing minutes by the board, together with its counsel and advisors, can serve as an integral part of the board’s deliberative process in arriving at a sound decision based on its considered business judgment. With both of these benefits in mind, the article identifies several effective and efficient practices. Strine offers a lot of wise counsel that readers may want to heed.
Is the SEC’s case against SolarWinds counterproductive?
You remember the 2020 SolarWinds hack, perhaps one of the worst cyberattacks in history? As described by NPR in 2021, the hack was “believed to be directed by the Russian intelligence service, the SVR,” which used a “routine software update to slip malicious code into Orion’s software and then used it as a vehicle for a massive cyberattack against America.” It was estimated that 18,000 customers were affected, including some very well-known companies and about a dozen government agencies including the Treasury, Justice and Energy departments, the Pentagon and, ironically, the Cybersecurity and Infrastructure Security Agency, part of the Department of Homeland Security. The SEC filed a complaint against SolarWinds and its Chief Information Security Officer, Timothy G. Brown, charging ‘fraud and internal control failures relating to allegedly known cybersecurity risks and vulnerabilities.” The gist of the complaint, as alleged by the SEC, is that many red flags emerged and incidents occurred, well known among company employees, that should have spurred the company and its CISO to take action to address serious cyber vulnerabilities, including vulnerabilities related to the company’s “crown jewel” assets. Instead, the SEC charged, the CISO “failed to resolve the issues or, at times, sufficiently raise them further within the company.” (See this PubCo post.) As discussed in this blogpost, Fatal Flaws in SEC’s Amended Complaint Against SolarWinds, from our White Collar Defense and Investigations group, this case has developed into a very high-stakes contest.
CAQ’s 2024 audit committee practices report discusses priorities and practices
The Center for Audit Quality has released its 2024 “Audit Committee Practices Report: Common Threads Across Audit Committees.” The report highlights the top five audit committee priorities identified by committee members in a survey from CAQ and discusses practices to improve effectiveness and other observations. Interspersed throughout the report are recommendations and advice from the CAQ. What was identified by respondents as the “most important topic, risk, or issue” for their audit committees in the next 12 months? Not financial reporting or financial audits—core responsibilities for the audit committee—as you might expect. Nope, it was cybersecurity. According to the CAQ report, the scope of audit committee responsibilities “continues to expand beyond the traditional remit of financial reporting and internal controls, internal and external audit, and ethics and compliance programs. Topics like cybersecurity, artificial intelligence (AI), and climate are now regularly showing up on many audit committee agendas, especially when it’s a matter of complying with regulatory disclosure requirements.” Audit committee members and their advisors may want to check out the report.
Chamber seeks to intervene in environmental group challenges to SEC climate disclosure rules
As you probably remember, the SEC’s climate disclosure rules were challenged not only by those contending that the rules went too far and that the SEC had no authority—think, for example, Liberty Energy, the State of Iowa and the Chamber of Commerce—but also by the Sierra Club and the Natural Resources Defense Council, which claimed that the SEC did have the legal authority to adopt the rules but did not go far enough and left out some important information. All those cases have recently been consolidated in the Eighth Circuit. Now, the Chamber of Commerce has moved for leave to intervene in the cases brought by the Sierra Club and the NRDC “to defend those portions of the final rule that refrained from imposing the additional disclosure requirements the environmental groups would have this Court require the SEC to impose.” The Sierra Club, the motion contends, “intends to argue that the SEC should have required public companies to disclose not only their own greenhouse-gas emissions, but also the emissions from the ‘use of [their] products’ and across their ‘supply chains’”; that is, that the SEC failed to impose a requirement to disclose Scope 3 GHG emissions.
Delaware Supreme Court applies MFW framework to other conflicted transactions
In In re Match Group, Inc. Derivative Litigation, the Delaware Supreme Court answered some important questions about the standard of review applicable to conflicted transactions under Delaware law. The first question relates to the application of the model used in Kahn v. M & F Worldwide Corp., commonly referred to as the “MFW framework.” In that 2014 case, the Delaware Supreme Court held that, instead of the more stringent “entire fairness” standard of review that would ordinarily apply in the context of mergers between a controlling stockholder and its corporate subsidiary, the business judgment standard of review should govern “where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.” The question remained, however, whether, in the context of conflicted controlling stockholder transactions that do not involve freeze-out mergers, MFW may be applied to invoke the business judgment rule. And in a related question, can the business judgment rule be applied if the “defendant shows either approval by an independent special committee or approval by an uncoerced, fully informed, unaffiliated stockholder vote,” but not both? In addition, the Court addressed the question of whether all members of an “independent special committee” must be “independent” to satisfy the requirements of MFW.
Another House hearing on climate disclosure rules?
Yesterday, the House Financial Services Committee held a hearing entitled “Beyond Scope: How the SEC’s Climate Rule Threatens American Markets.” Since, as one of the committee members observed, this is their sixth hearing on the SEC and twelfth on climate change, there was a lot of the same old, same old—just from different witnesses. (One Committee member called this topic a “manufactured culture war” that the Committee is relitigating; why was the Committee wasting time on this topic when they should be dealing with the problems in housing?) At the hearing, we heard familiar statements to the effect of: the SEC is just pandering to political interest groups; the rules require “extensive and granular” disclosure of information that many do not view to be material; the rules are outside the SEC’s authority and an instance of “mission creep”; this is an attempt by the Biden administration to use regulation to force on the public the climate agenda that it was unable to get through Congress; the costs will be burdensome especially for smaller companies and will result in higher costs and fewer public companies. Or: investors have been demanding this information; voluntary disclosure is inconsistent, unreliable and not comparable; and many companies will already need to comply with the more rigorous rules of the EU and California anyway, so the cost will not be as great as some fear; the SEC acted completely within its wheelhouse. Sound familiar? But there were some highlights, so let’s hit those.
NYSE proposes to allow continued SPAC listing for additional six months
For those doing SPACs, you may want to take note of this recent proposed rule change from the NYSE. The proposal would amend Section 102.06 of the Listed Company Manual to allow a SPAC to “remain listed until forty-two months from its original listing date if it has entered into a definitive agreement with respect to a business combination within three years of listing.”
What happened at the Corp Fin Workshop of PLI’s SEC Speaks 2024?
At the Corp Fin Workshop last week, a segment of PLI’s SEC Speaks 2024, the panel focused on disclosure review, a task that occupies 70% of Corp Fin attorneys and accountants. The panel discussed several key topics, looking back to 2023 and forward to 2024. Some of the presentations are discussed below.
The jury finds shadow trading is a thing
The trial took eight days. The jury took two hours. On Friday, in the case of SEC v. Panuwat, the jury in a federal district court in California determined that Matthew Panuwat was civilly liable for insider trading under the misappropriation theory. This case dates back to August 2021, when the SEC filed a complaint in the U.S. District Court charging 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, Pfizer. As you know by now, this case has often been viewed as highly unusual: Panuwat didn’t trade in shares of Medivation or shares of the acquiror, nor did he tip anyone about the transaction. No, the SEC’s novel—but winning—theory of the case was that Panuwat engaged in “shadow trading,” using the information about the acquisition of his employer to purchase call options on Incyte Corporation, another biopharma that the SEC claimed was comparable to Medivation, based on an assumption that the acquisition of Medivation at a healthy premium would probably boost the share price of Incyte. Panuwat made over $120,000 in profit. According to a statement from the Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, “[a]s we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple. Defendant used highly confidential information about an impending announcement of the acquisition of biopharmaceutical company Medivation, Inc., the company where he worked, by Pfizer Inc. to trade ahead of the news for his own enrichment. Rather than buying the securities of Medivation, however, Panuwat used his employer’s confidential information to acquire a large stake in call options of another comparable public company, Incyte Corporation, whose share price increased materially on the important news.”
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