When the press publishes articles alleging that a slew of profitable businesses are, quite legally, not paying much—if anything—in income taxes, and politicians argue that companies are just not paying their fair share, it’s bound to raise a few hackles. Now, this article in Bloomberg reports that tax transparency has become one of the “under-the-radar” elements of ESG disclosure that’s “gaining traction.” According to the article, ESG-oriented investors “want large public companies to disclose where they shift their profits and how much they pay in taxes, and to cut back on aggressive tax planning.”
On Friday, the President signed an Executive Order designed to promote competition in the American economy. Here is the Fact Sheet. The Order, which, in addition to corporate consolidation, relates to barriers to competition and the impact on the workforce and consumers of the lack of competition, includes “72 initiatives by more than a dozen federal agencies to promptly tackle some of the most pressing competition problems across our economy.” The Order addresses several industries specifically, such as tech, financial services, telecom, agriculture, transportation and shipping, and pharma and healthcare. The Order could also broadly impact a number of other industries, for example, through efforts to curtail the use of “non-compete and other clauses or agreements that may unfairly limit worker mobility” or efforts to limit “manufacturers from barring self-repairs or third-party repairs of their products.” For the most part, the Order does not change the law or even any regulations at this point, and some of the agencies identified, such as the FTC, are independent and not subject to Presidential directives. Congress and the courts are likely to have a say as well. Nevertheless, companies may want to assess whether the initiatives and shift in regulatory emphasis may have some impact on their businesses that could warrant disclosure.
Yesterday, at a meeting of the SEC’s Asset Management Advisory Committee, the Committee adopted recommendations (developed by the ESG Subcommittee) regarding ESG disclosure by issuers, intended to improve the information and disclosure used by investment managers for ESG investing. While addressing a broad array of issues regarding ESG investment products, the Committee recognized “that issuer disclosure is the starting discussion point for all ESG matters.” Given the dependence of the investment management industry on issuer disclosure regarding ESG matters and the resulting demand for consistent and comparable ESG disclosure, the recommendations are surprisingly mild—designed to prod rather than mandate.
In 2018, a Harvard law professor submitted (on behalf of a related trust/shareholder) a shareholder proposal to Johnson & Johnson requesting that the board adopt a mandatory arbitration bylaw. After receiving a no-action letter from Corp Fin, J&J excluded the proposal, and the professor then sued J&J. A decision has just been rendered dismissing the complaint. But that’s not necessarily the end of the shareholder’s proposal to J&J for mandatory arbitration.
In In re Alphabet Securities Litigation., the State of Rhode Island, as lead plaintiff, filed a Rule10b-5 action against Google LLC, its holding company Alphabet, Inc., and certain executives, alleging that the defendants failed to timely disclose certain cybersecurity defects and vulnerabilities. The district court granted defendants’ motion to dismiss the complaint, but on appeal, a three-judge panel of the 9th Circuit reversed in part, holding that the complaint “plausibly alleged” that the decision to omit information about these cybersecurity vulnerabilities “significantly altered the total mix of information available for decision-making by a reasonable investor” and that scienter—intent to deceive, manipulate or defraud—was adequately alleged. Importantly, the Court held that the complaint contained a plausible allegation that Alphabet’s omission was materially misleading: its risk factor discussion of cybersecurity was framed in the hypothetical, while, it was alleged, the “hypothetical” events had in fact already come to fruition. The case serves as a reminder of a couple of now-familiar themes: companies need to regularly review their risk factor disclosures, even when—or perhaps especially when—they are incorporating them by reference to ensure that they have been appropriately updated to reflect actual events that may have made the risks described as merely hypothetical no longer so. It’s also notable that this case represents the second recent instance of allegations of failure to disclose the discovery of a material cybersecurity “vulnerability”—in the absence of a cyberattack—with disclosure ultimately compelled by the publication of an article exposing the defects. It’s another reminder that companies need to be vigilant for potential disclosure obligations about cybersecurity that might arise outside the context of cyberattacks and hacks—in the more-difficult-to-assess context of cybersecurity vulnerabilities.
On Monday, in a keynote address before the Society for Corporate Governance 2021 National Conference, SEC Commissioner Allison Herren Lee discussed the challenges boards face in oversight of ESG matters, including “climate change, racial injustice, economic inequality, and numerous other issues that are fundamental to the success and sustainability of companies, financial markets, and our economy.” Shareholders, employees, customers and other stakeholders are now all looking to corporations to adopt policies that “support growth and address the environmental and social impacts these companies have.” Why is that? Because actions or inactions by our largest corporations can have a tremendous impact. According to Lee, a 2018 study showed that, of the top 100 revenue generators across the globe, only 29 were countries—the rest were corporations, that is, corporations “often operate on a level or higher economic footing than some of the largest governments in the world.”
Last week, in a bipartisan move, Senators Chris Van Hollen and Deb Fischer reintroduced the “Promoting Transparent Standards for Corporate Insiders Act.” According to the press release, the legislation is designed to address concerns that some insiders “may be abusing loopholes in this system, which hurts everyday investors and reduces confidence in the integrity of our capital markets.” The bill would require the SEC to conduct a study to determine whether Rule 10b5-1 should be amended, report back to Congress within 180 days and amend Rule 10b5-1 within a year consistent with the study’s findings.
In a recent speech, SEC Chair Gary Gensler conveyed a sense of full steam ahead with regard to mandatory disclosure requirements about climate and human capital. (See this PubCo post.) The day before, Commissioner Elad Roisman also addressed potential ESG disclosure requirements, but from quite a different perspective—concern. While he understands that there is a demand for consistent standardized ESG disclosure, especially about climate, is it premature to attempt to standardize, he wonders? To what extent does the SEC have a legislative mandate to construct ESG disclosure rules? And how is the SEC—a bunch of lawyers and accountants and economists—ever going to craft and oversee ESG regulation effectively? When you get down to it, his question is this: Is the SEC the right agency for rulemaking about ESG (particularly climate) disclosure?
In remarks yesterday at London City Week, SEC Chair Gary Gensler elaborated a bit on the bare bones of some of the almost 50 items on the Reg-Flex Agenda that was made public earlier this month. (See this PubCo post.) In Gensler’s view, disclosure protects investors by helping them invest in “companies that fit their investing needs,” helps companies by facilitating capital formation and benefits markets by helping to keep them fair, orderly and efficient—all core responsibilities within the remit of the SEC.
In Meland v. Padilla, a shareholder of a publicly traded company filed suit in federal district court seeking a declaratory judgment that SB 826, California’s board gender diversity statute, was unconstitutional under the equal protection provisions of the 14th Amendment. In April 2020, a federal judge dismissed that legal challenge on the basis of lack of standing. On Monday, a three-judge panel of the 9th Circuit reversed that decision, allowing the case, now called Meland v. Weber, to go forward. The Court held that, because the plaintiff “plausibly alleged that SB 826 requires or encourages him to discriminate on the basis of sex, he has adequately alleged that he has standing to challenge SB 826’s constitutionality.”