Starbucks decision to adopt DEI initiative within Board’s business judgment
In August last year, the National Center for Public Policy Research filed a complaint against Starbucks and its officers and directors, National Center for Public Policy Research v. Schultz, alleging that they caused Starbucks to adopt a group of policies that discriminate based on race in violation of a “wide array of state and federal civil rights laws.” Starbucks characterized the policies as designed to “realize its ‘commitment to Inclusion, Diversity, and Equity[.]’” Starbucks, its officers and directors moved to dismiss, and a hearing on the motion was held on August 11, 2023. At the hearing, the Federal District Court for the Eastern District of Washington granted the motion to dismiss with prejudice and closed the case. A month on, the Court’s Order has now been released. While the Order discusses the various legal bases for the dismissal, the Court’s sentiment was perhaps best summed up by its statement in the Order that “[t]his Complaint has no business being before this Court and resembles nothing more than a political platform.” Much like the recent decision of the Delaware Chancery Court in Simeone v. The Walt Disney Company, the Court concluded that “[c]ourts of law have no business involving themselves with reasonable and legal decisions made by the board of directors of public corporations.” Are we starting to see a trend with regard to board business decisions about corporate social policy?
SEC charges Fluor with improper accounting and inadequate internal accounting controls
In this Order, the SEC brought settled charges against Fluor Corporation, a global engineering, procurement and construction company listed on the NYSE, in connection with alleged improper accounting on two large-scale, fixed-price construction projects. Five current and former Fluor officers and employees were also charged. (The press release includes links to the orders for the five individuals.) Fixed-price contracts mean that cost overruns are the contractor’s problem, not the customer’s, and Fluor’s bids on the two projects were based on “overly optimistic cost and timing estimates.” When Fluor experienced cost overruns, the SEC alleged, Fluor’s internal accounting controls failed, with the result that Fluor used improper accounting for these projects that did not comply with the percentage-of-completion accounting method under GAAP, leading Fluor to materially overstate its net earnings for several annual and quarterly periods. A restatement ultimately followed. Fluor agreed to pay a civil penalty of $14.5 million and the officers to pay civil penalties between $15,000 and $25,000. According to the Associate Director in the Division of Enforcement, “[d]ependable estimates and the internal accounting controls that facilitate them are the backbone of percentage of completion accounting and are critical to the accuracy of the financial statements that investors rely on….We will continue to hold companies and individuals accountable for serious controls failures and resulting recordkeeping and reporting violations.”
Corp Fin posts sample comment letter on XBRL
Corp Fin has posted a sample comment letter to companies about their XBRL disclosures. I don’t pretend to know or understand a thing about XBRL, much less Inline XBRL, so I won’t even try to elaborate but, for your reading pleasure, here are the comments.
Are springing penalties a thing? SEC charges Plug Power with accounting, reporting and control failures
In this Order, the SEC brought settled charges against Plug Power, Inc., a provider of green hydrogen and hydrogen-fuel-cell solutions, for financial reporting, accounting and controls failures in connection with a variety of the Company’s complex business transactions. The failures required Plug to restate its financial statements for several years. In the restatement, Company management identified a material weakness in internal control over financial reporting and ineffective disclosure controls and procedures, allegedly “due to Plug Power’s failure to maintain a sufficient complement of trained, knowledgeable personnel to execute their responsibilities for certain financial statement accounts and disclosures. Despite these control deficiencies, the Company raised over $5 billion from investors during the relevant Filing Period.” According to the SEC, Plug’s “material weakness in ICFR and ineffective DCP have not been fully remediated,” and the Company is continuing its remediation efforts. Plug agreed to pay a civil penalty of $1.25 million and to implement a number of undertakings, including an undertaking “to fully remediate the Company’s material weakness in ICFR and ineffective DCP within one year” of the SEC’s Order. Should Plug fail to comply with those undertakings, the Company will be required to pay a “springing penalty,” an additional civil penalty of $5 million.
Nasdaq proposes to amend listing rules regarding waivers of code of conduct
Yesterday, the SEC posted, and declared immediately effective, a Nasdaq rule proposal that would modify the requirements related to waiver of the code of conduct in Listing Rules 5610 and IM-5610. Under current listing rules, all listed companies must adopt a code of conduct (which must meet the definition of a “code of ethics” in SOX 406(c)), applicable to all directors, officers and employees, and make that code publicly available. Each code of conduct must also contain an enforcement mechanism that ensures prompt and consistent enforcement of the code, protection for persons reporting questionable behavior, clear and objective standards for compliance, and a fair process by which to determine violations. Under current listing rules, waivers of the code for directors or executive officers must be approved by the Board and must be publicly disclosed. The proposal expands the approval authority for code waivers and adds new time deadlines for disclosure of code waivers by foreign private issuers. Companies may want to review their codes of conduct to make changes as appropriate.
Will the SEC beat the clock on the Gensler agenda?
In an article in 2022, Politico reported that SEC Chair Gary “Gensler has come under fire for the pace of rulemaking coming out of the agency, with critics claiming that dissecting the flood of new proposals in such short periods of time is impractical. Gensler has pointed out that the number of proposals [is] largely on par with what former SEC chairs like Clayton have done. The latest proposals have just been more clustered than in the past, Gensler said.” That’s a response that I’m sure I’ve heard any number of times during Congressional hearings. Is that still the case? To find out, Bloomberg performed a count of SEC records from 2001 to 2023 to assess the extent of rulemaking in the first two years, four months and one week into the tenures of several of the SEC Chairs over that period who were confirmed to lead the SEC at the start of a new administration. The answer? Yes and no. According to Bloomberg, the “SEC under Chair Gary Gensler is issuing regulations at its slowest pace in decades for a new presidential administration,” having adopted just 22 final rules since his tenure began in 2021. By comparison, over the same periods, the SEC under Jay Clayton had adopted 25 final rules, under Mary Schapiro, 28 rules, and under Harvey Pitt, a whopping 34 rules (many implementing the SOX mandate). So were all the complaints about the tsunami of rulemaking just misguided? Not exactly. As Bloomberg notes, “[d]espite trailing his recent predecessors on final rules, Gensler’s proposal tally of 49 exceeds Clayton’s 28 and Pitt’s 48, but is less than Schapiro’s 65.” [Emphasis added.] For the agenda of the Gensler administration, that leaves quite a chasm at this point between rules that are final and rules that are just proposed. What might that mean for SEC priorities? Bloomberg takes a deep dive.
New CDIs on stock buybacks and foreign private issuers
In May, the SEC adopted a proposal intended to modernize and improve disclosure regarding company stock repurchases. One fortunate aspect of the final rules—for domestic companies, that is—was that the new rule did away with the proposed new Form SR for reporting of daily repurchase data by domestic companies and, instead, moved to quarterly reporting of detailed quantitative information on daily repurchase activity, to be filed as exhibits to companies’ periodic reports. But that was not the case for foreign private issuers. The final rules require FPIs that report on FPI forms to disclose daily quantitative repurchase data at the end of every quarter on new Form F-SR, due 45 days after the end of the FPI’s fiscal quarter. Some commenters on the proposal had suggested exempting FPIs that already make repurchase disclosure under home-country rules, but the SEC elected not to do so in light of its view that the detailed disclosure would be beneficial for all investors in companies that conduct repurchases. The SEC noted, however, that, if an FPI’s home country disclosures furnished on Form 6-K satisfy the Form F-SR requirements, it can incorporate those disclosures by reference into its Form F-SR. (See this PubCo post.)
Now, Corp Fin has issued three new CDIs, summarized below, related to new Form F-SR addressing reporting in the absence of repurchases and reporting for the final fiscal quarter.
SEC Chief Accountant warns against narrow focus in risk assessments
In this Statement, The Importance of a Comprehensive Risk Assessment by Auditors and Management, SEC Chief Accountant Paul Munter cautions auditors and company managements against conducting risk assessments that focus too narrowly “on information and risks that directly impact financial reporting, while disregarding broader, entity-level issues that may also impact financial reporting and internal controls.” Similarly, auditors and managements may sometimes dismiss isolated incidents, perhaps as a result of confirmation bias, without adequately analyzing whether these issues might be indicative of larger issues that require responsive action and disclosure. Munter warns that “[s]uch a narrow focus is detrimental to investors as it can result in material risks to the business going unaddressed and undisclosed, thereby diminishing the quality of financial information.” Management, Munter warns, must “take a holistic approach when assessing information about the business and avoid the potential bias toward evaluating problems as isolated incidents, in order to timely identify risks, including entity-level risks.” Managements and audit committees may want to take note.
You might want to think twice before describing pending litigation as “without merit”
There’s definitely a lesson to be learned from this recent case from the Massachusetts Federal District Court, City of Fort Lauderdale Police & Firefighters’ Ret. Sys. v. Pegasystems Inc.: companies making public statements about pending litigation should be very cautious when characterizing their views on the merits or prospects of that litigation. There may well be occasions when describing litigation as “without merit” may be, well, merited. But companies should keep in mind that claiming that a complaint against the company is “without merit”—as companies often do—may just shake up a whole new hornets’ nest, as it did in this case. (Hat tip to The 10b-5 Daily.)
Corp Fin issues some new CDIs on Rule 10b5-1 plans
On Friday afternoon, Corp Fin issued several new CDIs regarding Rule 10b5-1 plans. As you may recall, in December last year, the SEC adopted new amendments to the rules regarding Rule 10b5-1 plans. These amendments added new conditions to the affirmative defense of Rule 10b5-1(c) designed to address concerns about abuse of the rule by opportunistic trading on the basis of material non-public information. Among other changes, Rule 10b5-1(c)(1) was amended to apply a cooling-off period to persons other than the issuer, impose a good-faith certification requirement on directors and officers, limit the ability of persons other than the issuer to use multiple overlapping Rule 10b5-1 plans, limit the use of single-trade plans by persons other than the issuer to one single-trade plan in any 12-month period, and add a condition that all persons entering into Rule 10b5-1 plans must act in good faith with respect to those plans. In addition, the amendments included requirements for new disclosures regarding (1) companies’ insider trading policies and procedures; (2) director and officer equity compensation awards made close in time to company to disclosure of MNPI; (3) adoption or termination by officers of directors of any 10b5-1 plan or “non-Rule 10b5-1 trading arrangement”; and (4) bona fide gifts of securities on Forms 4 by Section 16 filers and transactions under 10b5-1 plans on Forms 4 and 5. ) (See this PubCo post.)
The new CDIs, summarized below, address calculation of the cooling-off period, overlapping plans involving 401(k) plans, the new Form 4 checkbox and disclosures about adoption and termination of trading arrangements.
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