What’s happening with critical audit matters?
Ideagen AuditAnalytics has just released its 2024 Report on Critical Audit Matters, a 3-Year Review, covering the years 2020 to 2022. Under the auditing standard for the auditor’s report (AS 3101), adopted in 2017, CAMs are defined as “matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment.” Essentially, the concept is intended to capture the matters that kept the auditor up at night, so long as they meet the standard’s criteria. AS 3101 was initially adopted in 2017 and phased in beginning in 2019 according to the status of the filer. (See this PubCo post.) The Report provides data on the prevalence of CAMs and the most common topics for CAMs, and takes a deeper dive on matters such as valuation of assets in the merger context and going concerns.
Was it SPAC week? SEC charges SPAC with misleading statements
Perfectly calibrated to slap an exclamation point on last Wednesday’s 581-page SPAC release (see this PubCo post), this new SEC Order, posted the following day, reflects settled charges against Northern Star Investment Corp. II, a SPAC, for misleading statements in its SEC filings in connection with its SPAC IPO and failed de-SPAC transaction. In the SPAC release, the SEC noted concerns from commentators regarding the adequacy of the disclosures provided to investors in SPAC IPOs and de-SPAC transactions. In this case, the SEC charged that Northern Star stated in its SEC filings that, prior to filing its S-1 for its IPO, it had had no substantive discussions with any potential target; in reality, however, Northern Star had had several discussions with the ultimate target regarding a potential SPAC business combination. According to the Director of the SEC’s Philadelphia Regional Office, “Northern Star’s failure to disclose discussions with its merger target kept investors in the dark about its future plans, information that would have been important in deciding whether to invest in this SPAC….Given that the purpose of a SPAC is to identify and acquire an operating business, SPACs should be transparent about any pre-IPO discussions with potential acquisition targets.” Northern Star was ordered to pay a civil money penalty of $1.5 million for violation of the antifraud provisions of the Securities Act.
Exxon employs “direct-to-court” strategy for shareholder proposal. Will others do the same?
Back in 2014, a few companies, facing shareholder proposals from the prolific shareholder-proposal activist, John Chevedden, and his associates, adopted a “direct-to-court” strategy, bypassing the standard SEC no-action process for exclusion of shareholder proposals. In each of these cases, the court handed a victory of sorts to Mr. Chevedden, refusing to issue declaratory judgments that the companies could exclude his proposals. (At the end of the day, one proposal was defeated, one succeeded and one was ultimately permitted to be excluded by the SEC. See this PubCo post, and these News Briefs of 3/18/14, 3/13/14 and 3/3/14.) Now, ten years later, ExxonMobil has picked up the baton, having just filed a complaint against Arjuna Capital, LLC and Follow This, the two proponents of a climate-related shareholder proposal, seeking a declaratory judgment that it may exclude their proposal from its 2024 annual meeting proxy statement. In summary, the proposal asks Exxon to accelerate the reduction of GHG emissions in the medium term and to disclose new plans, targets and timetables for these reductions. Will Exxon meet the same fate as the companies in 2014? Perhaps more significantly, Exxon took this action in part because it viewed the SEC’s shareholder proposal process as a “flawed” system “that does not serve investors’ interests and has become ripe for abuse by activists with minimal shares and no interest in growing long-term shareholder value.” If Exxon is successful in its litigation, will more companies, likewise faced with environmental or social proposals and perhaps perceiving themselves beset by the same flawed process, follow suit (so to speak) and sidestep the SEC?
SEC adopts new rules on SPACs—just investor protection or will it spell the demise of SPACs?
Recently, SPACs seem to have lost much of their allure, but why? Certainly there are multiple reasons related to the capital markets, but one reason may have been the anxiety of many SPAC proponents precipitated by the proposal that the SEC advanced in 2022 to regulate SPAC and de-SPAC disclosure and liability. Commissioner Hester Peirce, who had dissented on even issuing the proposal, remarked at the time that the proposal “seem[ed] designed to stop SPACs in their tracks.” Yesterday, the SEC voted, three to two, to adopt those rules, with some changes. The new rules and amendments will affect SPACs, shell companies and the use of projections in SEC filings. The SEC is also issuing new guidance addressing potential underwriters in de-SPAC transactions, as well as the status of SPACs under the Investment Company Act of 1940 (in lieu of adopting a proposed rule). According to Gensler, “Today’s adoption will help ensure that the rules for SPACs are substantially aligned with those of traditional IPOs, enhancing investor protection through three areas: disclosure, use of projections, and issuer obligations. Taken together, these steps will help protect investors by addressing information asymmetries, misleading information, and conflicts of interest in SPAC and de-SPAC transactions.” Peirce and Commissioner Mark Uyeda dissented, in essence, viewing the new rules as “merit regulation” and overkill, with the emphasis on “kill”—that is, as Peirce commented, the “regulatory reaper came for SPACs and seems to have won.” Similarly, Uyeda remarked that, with the current SPAC market just “a shell of its former self,” the new rules show that the SEC “intends to never let them return.” The final rules will become effective 125 days after publication in the Federal Register, except that compliance with the requirement to use inline XBRL will not be mandatory until 490 days after publication in Federal Register.
House hearing raises specter of serious legal hurdles for climate proposal—will the SEC backtrack?
Last week, a House Financial Services subcommittee held a hearing with the ominous title “Oversight of the SEC’s Proposed Climate Disclosure Rule: A Future of Legal Hurdles.” Billed as oversight, the hearing certainly highlighted the gauntlet that the SEC would have to run if the rules were adopted as is. Not that SEC Chair Gary Gensler wasn’t already well aware that the climate proposal is facing a number of legal challenges. Will this gentle “reminder” by the subcommittee, together with recent court decisions, perhaps lead the SEC to moderate some of the most controversial aspects of the proposal, such as the Scope 3 and accounting requirements? The witnesses were a VP of the National Association of Manufacturers, counsel from BigLaw, a farmer and an academic.
NYSE’s proposed listing standards for Natural Asset Companies bite the dust
Last year, the NYSE proposed to adopt new listing standards for the common equity securities of a “Natural Asset Company,” a new type of public company defined by the NYSE as “a corporation whose primary purpose is to actively manage, maintain, restore (as applicable), and grow the value of natural assets and their production of ecosystem services.” Although existing regulatory and listing requirements would continue to apply to NACs, the proposal contemplated, in addition, a fairly elaborate new NAC governance and reporting ecosystem involving specific provisions in corporate charters, new mandatory policies (environmental and social, biodiversity, human rights, equitable benefit sharing), new prescribed responsibilities for audit committees and a new reporting framework, including mandatory “Ecological Performance Reports.” (See this PubCo post.) Why did the NYSE introduce this proposal? Notwithstanding all of the developments in ESG disclosure and investing (such as ESG funds), the NYSE contended that “investors still express an unmet need for efficient, pure-play exposure to nature and climate.” According to the Intrinsic Exchange Group, which pioneered the NAC concept and advises public sector and private landowners on the creation of NACs, “[b]y taking a NAC public through an IPO, the market transaction will succeed in converting the long-understood—but to-date unpriced—value of nature into financial capital. This monetization event will generate the funding needed to manage, restore, and grow healthy ecosystems around the world and bring us closer to achieving a truly sustainable, circular economy.” At the time of the proposal, I asked whether this proposal would be a game changer to rescue our environment or merely a chimera? The answer, at least for now, seems to be chimera. In December, the SEC instituted proceedings to determine whether to approve or disapprove the proposal, asking for comment on a number of questions that were based broadly on concerns raised by commenters, such as issues regarding the licensing arrangements for NACs and the relationship between NYSE and IEG. Then, on January 17, 2024, the NYSE withdrew its proposal. Why?
Atlantic herring get their day in court—does it spell the end of Chevron deference?
On Wednesday, SCOTUS heard oral argument—for over three and a half hours—in two very important cases, Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Dept of Commerce, about whether the National Marine Fisheries Service (NMFS) has the authority to require Atlantic herring fishing vessels to pay some of the costs for onboard federal observers who are required to monitor regulatory compliance. And they’re important because… why? Because one of the questions presented to SCOTUS was whether the Court should continue the decades-long deference of courts, under Chevron U.S.A., Inc. v. Nat. Res. Def. Council, to the reasonable interpretations of statutes by agencies. The doctrine of Chevron deference mandates that, if a statute does not directly address the “precise question at issue” or if there is ambiguity in how to interpret the statute, courts must accept an agency’s permissible interpretation of a law unless it is arbitrary or manifestly contrary to the statute. Of course, the conservative members of the Court have long signaled their desire to rein in the dreaded “administrative state,” especially when agencies are advancing regulations that conservative judges perceive as too “nanny state.” And overruling Chevron is one way to do just that. (See, for example, the dissent of Chief Justice John Roberts in City of Arlington v. FCC back in 2013, where he worried that “the danger posed by the growing power of the administrative state cannot be dismissed,” not to mention the concurring opinion of Justice Neil Gorsuch in the 2016 case, Gutierrez-Brizuela v. Lynch, where he referred to Chevron as an “elephant in the room” that permits “executive bureaucracies to swallow huge amounts of core judicial and legislative power.” And then there’s Justice Brett Kavanaugh’s 2016 article, Fixing Statutory Interpretation, in which he argues that Chevron is a “judicially orchestrated shift of power from Congress to the Executive Branch.” See the SideBars below.) But, in recent past cases, SCOTUS has resolved issues without addressing Chevron, looking instead to theories such as the “major questions” doctrine. (See this PubCo post.) The two cases now before the Court, however, may well present that long-sought opportunity. Depending on the outcome, their impact could be felt far beyond the Marine Fisheries Service at many other agencies, including the SEC and the FDA. Will we soon be seeing a dramatically different sort of administrative state? To me, it seemed pretty clear from the oral argument that SCOTUS is likely to jettison or significantly erode Chevron. Among the most conservative justices at least, there didn’t seem to be a lot of interest in half-measures—been there, done that. (The concept of the Court’s limiting its decision to whether statutory silence should be treated as ambiguity, as some had hoped, did not even come up for serious discussion.) But what approach the Court might take—overrule Chevron with no alternative framework suggested, adopt a version of “weak deference” as outlined in a 1944 case, Skidmore v. Swift & Co., or possibly even “Kisorize” (as they termed it) Chevron by imposing some serious limitations, as in Kisor v. Wilkie—that remains to be seen.
What’s new in best practices for board governance in 2024?
In this brand new report, The Conference Board looked at several of the less glitzy areas of board governance to identify some evolving best practices for attaining board excellence, such as board continuing education. From AI to ESG, corporate boards are bombarded by new and important issues about which they must attain some level of understanding and fluency. But how? Is there anything new in best practices for continuing education? Other areas of focus in the report are board self-evaluations, director overboarding and committee rotation. Are there any developments in best practices in those areas? TCB has some data and some advice, discussed below.
Is ESG backlash triggering a change in policies or just a change in terminology?
As discussed in this article from the WSJ, The Latest Dirty Word in Corporate America: ESG, ESG backlash is driving many company executives to drop any reference to “ESG” and instead use terms like “sustainability” or “responsible business,” or opt for “green hushing” altogether. Citing an analysis from FactSet, the WSJ reported that, on “earnings calls, mentions of ESG rose steadily until 2021 and have declined since…. In the fourth quarter of 2021, 155 companies in the S&P 500 mentioned ESG initiatives; by the second quarter of 2023, that had fallen to 61 mentions.” But are companies just turning down the volume while still pursuing the same aspirations or have they trimmed their objectives too?
Corp Fin updates guidance on extensions of confidential treatment orders—again
To start the new year, Corp Fin has posted an updated version of Disclosure Guidance: Topic No. 7, Confidential Treatment Applications Submitted Pursuant to Rules 406 and 24b-2. The guidance addresses procedures for CTRs that were submitted, not under the streamlined approach adopted in 2019 (see this PubCo post), but rather under the old traditional process that continues in use to a limited extent. The revamped guidance—which, as always, is just that and not intended to be binding—explains that the guidance has been generally updated, but the focus is on changes made regarding alternatives for confidential treatment orders that are about to expire. The processes for obtaining extensions have gone through a number of permutations. Under this newest update, the guidance provides that different extension procedures apply depending on whether the CT order was initially granted more or less than three years ago. The prior version of this guidance, adopted in 2021, pegged the type of extension procedure available to a fixed date (October 15, 2017) rather than to a rolling three-year period. But the version before that did use a rolling three-year period. Go figure.
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