Are SPACs really “investment companies”?

Not according to 49 major law firms! Earlier this month, a shareholder of Pershing Square Tontine Holdings, Ltd., filed derivative litigation against the company’s board, its sponsor and other related companies, contending that the company, a SPAC organized by a billionaire hedge-fund investor, is really an investment company that should be registered under the Investment Company Act of 1940 and that its sponsor is really an investment adviser that should be registered under the Investment Advisers Act of 1940. Had they registered, so the argument goes, they would have been subject to substantial regulation regarding the rights of the SPAC’s shareholders and the form and amount of the SPAC managers’ compensation. According to the complaint, under the ICA, “an Investment Company is an entity whose primary business is investing in securities. And investing in securities is basically the only thing that PSTH has ever done.” The complaint sought “a declaratory judgment, damages, and rescission of contracts whose formation and performance violate” the ICA and IAA. What’s especially notable about the litigation—aside from its novel premise—is that the plaintiff’s lawyers include Yale law professor John Morley and Robert Jackson, an NYU law professor and former SEC Commissioner.  Now, a group of 49 major law firms—including Cooley—have issued a joint statement pushing back on the plaintiff’s claims, asserting that there is no legal or factual basis for the allegation that SPACs are investment companies.

SEC approves NYSE amendment of related-party transaction review requirement

In April 2021, the SEC approved an NYSE proposal to relax the requirements for shareholder approval of related-party equity issuances and bring them into closer alignment with the comparable Nasdaq rules. (See this PubCo post.) Among the provisions amended was Section 314, which requires that a “related-party transaction” be reviewed by the board.  However, the amendments created something of a hiccup for many companies. Since the adoption of amendments, the NYSE has learned that the new rules had the “unintended effect of disrupting the normal course transactions of listed companies,” and “created a significant compliance burden.” As a result, the NYSE proposed to rectify the problem by again amending Section 314. The SEC has just approved that amendment.  

SEC charges healthcare services company engaged in earnings management

Yesterday, the SEC announced settled charges against Healthcare Services Group, Inc., a provider of housekeeping and other services to healthcare facilities, its CFO and its controller, for alleged failures to properly accrue and disclose litigation loss contingencies—accounting and disclosure violations that “enabled the company to report inflated quarterly [EPS] that met research analysts’ consensus estimates for multiple quarters.”  This action is the result of SEC Enforcement’s “EPS Initiative, which uses risk-based data analytics to uncover potential accounting and disclosure violations caused by, among other things, earnings management practices.” Gurbir Grewal, the new Director of Enforcement, warned that the SEC will continue to leverage its “in-house data analytic capabilities to identify improper accounting and disclosure practices that mask volatility in financial performance, and continue to hold public companies and their executives accountable for their violations.” The company paid $6 million to settle the action. The SEC Order makes the matter of accruing for loss contingencies sound simple and straightforward, implying that the company’s behavior involved “big bath” accounting and other earnings management practices, and that may well be the case in this instance.  However, in many cases, deciding whether, when and what to disclose or accrue for a loss contingency is not so clear cut and can often be a challenging exercise.

Nasdaq offers more answers on board diversity rule

As you probably know, on August 6, the SEC approved Nasdaq’s proposal for a new listing rule regarding board diversity and disclosure, along with a proposal to provide free access to a board recruiting service. The new listing rule adopts a “comply or explain” mandate for board diversity for most listed companies and requires companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards in a matrix format. (See this PubCo post.) Shortly after SEC approval, Nasdaq posted a series of FAQs here.   Nasdaq has been expanding the FAQs to provide some additional useful answers, as summarized below.

SEC decreases fee rates for fiscal 2022, which begins October 1, 2021

Today, the SEC announced that it was reducing the fees it charges issuers to register their securities. In fiscal 2022, the fee rates for registration of securities and certain other transactions will be $92.70 per million dollars, down from $109.10 per million dollars last year.

Petition filed for review of SEC approval of Nasdaq board diversity rule

It should hardly come as a surprise to anyone that the new Nasdaq board diversity rule (see this PubCo post) would be challenged in the courts. The rule was approved by the SEC on Friday, August 6. On Monday. August 9, the Alliance for Fair Board Recruitment filed a slim petition under Section 25(a) of the Exchange Act in 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. The petition itself is not particularly revealing, but it’s notable that the petitioner is also the most recent plaintiff challenging California’s two board diversity laws.

Is this insider trading?

On Tuesday, the SEC announced that it had filed a complaint in the U.S. District Court charging 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.  But it’s not what you might think.  The employee didn’t trade in shares of Medivation or shares of the acquiror, nor did he tip anyone about the transaction.  No, according to the SEC, he used the information about his employer’s acquisition to purchase call options on a separate biopharma company, Incyte Corporation, which the SEC claims was comparable to Medivation.  According to the SEC, the employee made that purchase based on an assumption that the acquisition of Medivation at a healthy premium would probably boost the share price of Incyte. Incyte’s stock price increased after the sale of Medivation was announced.  The SEC charged that the employee breached his “duty to refrain from using Medivation’s proprietary information for his own personal gain” and traded ahead of the announcement, in violation of Rule 10b-5.  Will the SEC succeed or is the factual basis of the charge just too attenuated?

SEC charges another company for misleading cybersecurity disclosure

It’s déjà vu all over again! On Monday, the SEC announced settled charges against Pearson plc, an NYSE-listed, educational publishing and services company based in London, for failure to disclose a cybersecurity breach. You might recall that just a few months ago, the SEC announced settled charges against another company for failure to timely disclose a cybersecurity vulnerability that led to a leak of data, with disclosure ultimately spurred by imminent media reports.  Is there a trend here? In this instance, it wasn’t just a vulnerability—there was an actual known breach and exfiltration of private data.  Nevertheless, Pearson decided not to disclose it and framed its cybersecurity risk factor disclosure as purely hypothetical.  The SEC viewed that disclosure as misleading and imposed a civil penalty on Pearson of $1 million.  The case serves as yet another reminder of the dangers of risk disclosures presented as hypothetical when those risks have actually come to fruition—a presentation that has now repeatedly drawn scrutiny in the context of cybersecurity disclosure.

How do companies approach climate disclosure?

So, what are the GHG emissions for a mega roll of Charmin Ultra Soft toilet paper?  If you guessed 771 grams, you’d be right…or, at least, according to this article in the WSJ, you’d be consistent with the calculations of its carbon footprint made by the Natural Resources Defense Council.  By comparison, a liter of Coke emits 346 grams from farm to supermarket, as calculated by the company. That’s the kind of calculation that many public companies may all need to be doing in a few years, depending on the requirements of the SEC’s expected rulemaking on climate.  Of course, many companies are already doing those calculations and including them in their sustainability reports.  But they generally have discretion in deciding what to include. A mandate from the SEC could be something else entirely. The WSJ calls it “the biggest potential expansion in corporate disclosure since the creation of the Depression-era rules over financial disclosures that underpin modern corporate statements. Already it has kicked off a confusing melee as companies, regulators and environmentalists argue over the proper way to account for carbon.”

Did your company’s proxy distribution costs grow by 2400%? The NYSE has a new rule for you

And it may even help— to some extent. A number of companies received whopping bills in the last proxy season or two for proxy distribution costs—much bigger than normal.  How did that happen? As discussed on thecorporatecounsel.net blog, these types of increases have been attributed to “the proliferation of small accounts through no-fee trading platforms.” Many retail traders now hold very small numbers of shares of a large number of stocks, some as a result of recent opportunities to buy fractions or “slices” of shares that ultimately add up to one or more whole shares. And, in a number of cases, the retail traders didn’t even buy the shares; they were “gifted” by retail brokers as rewards for opening a new account or doing some other good deed for the benefit of the broker. It can all add up to surprisingly big charges for proxy distribution costs. But now there may be a bit of relief available—the SEC has just approved an NYSE proposal to “prohibit member organizations from seeking reimbursement, in certain circumstances, from issuers for forwarding proxy and other materials to beneficial owners.” “Certain circumstances” refers to free promotional shares awarded to account holders by brokerages. Notably, the blog raises the good question of how the exclusion will be enforceable in practice.