California appellate court upholds enforceability of exclusive federal forum provision
In Salzberg v. Sciabacucchi (pronounced Shabacookie), the Delaware Supreme Court unanimously held that charter provisions designating the federal courts as the exclusive forum for ’33 Act claims were “facially valid.” (See this PubCo post.) Given that Sciabacucchi involved a facial challenge, the Supreme Court had viewed the question of enforceability as a “separate, subsequent analysis” that depended “on the manner in which it was adopted and the circumstances under which it [is] invoked.” With regard to the question of enforceability of exclusive federal forum provisions if challenged in the courts of other states, the Delaware Supreme Court said that there were “persuasive arguments,” such as due process and the need for uniformity and predictability, that “could be made to our sister states that a provision in a Delaware corporation’s certificate of incorporation requiring Section 11 claims to be brought in a federal court does not offend principles of horizontal sovereignty,” and should be enforced. But would they be? Following Sciabacucchi, in light of the perceived benefits for defendants of litigating Securities Act claims in federal court, many Delaware companies that did not have FFPs adopted them, and companies with FFPs involved in ’33 Act litigation tried to enforce them by moving to dismiss state court actions. In 2020, in an apparent case of first impression, Wong v. Restoration Robotics, the San Mateo Superior Court in California upheld application of the FFP, declining “jurisdiction over the claims alleged against Restoration Robotics and its officers and directors only, pursuant to the FFP.” (See this PubCo post.) Plaintiff appealed. The California Court of Appeal, First Appellate District, has just affirmed the lower court’s decision, upholding enforcement of the FFP.
After dam collapse, SEC alleges false safety claims in sustainability reports and SEC filings
As described in this press release, the SEC has filed a complaint against Vale S.A., a publicly traded (NYSE) Brazilian mining company and one of the world’s largest iron ore producers, charging that it made “false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam. The collapse killed 270 people, caused immeasurable environmental and social harm, and led to a loss of more than $4 billion in Vale’s market capitalization.” The SEC alleged that Vale “fraudulently assured investors that the company adhered to the ‘strictest international practices’ in evaluating dam safety and that 100 percent of its dams were certified to be in stable condition.” Significantly, these statements were contained, not just in Vale’s SEC filings, but also, in large part, in its sustainability reports. According to Gurbir Grewal, Director of Enforcement, “[m]any investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions….By allegedly manipulating those disclosures, Vale compounded the social and environmental harm caused by the Brumadinho dam’s tragic collapse and undermined investors’ ability to evaluate the risks posed by Vale’s securities.” Notably, the press release refers to the SEC’s Climate and ESG Task Force formed last year in the Division of Enforcement “with a mandate to identify material gaps or misstatements in issuers’ ESG disclosures, like the false and misleading claims made by Vale.” The SEC’s charges arising out of this horrific accident are a version of “event-driven” securities litigation—brought this time, not by shareholders, but by the SEC.
Delaware bar recommends DGCL amendments, including officer exculpation charter provisions
The Council of the Corporation Law Section of the Delaware State Bar Association has provided recommendations to the Delaware General Assembly for a number of changes to the Delaware General Corporation Law, some of them significant, such as an amendment authorizing charter provisions that would eliminate the personal liability of specified officers for breaches of the duty of care—basically, an extension of DGCL Section 102(b)(7). Typically, the Delaware legislature follows the Council’s recommendations. If adopted and signed into law, the amendments would become effective on August 1, 2022, and generally would apply to actions taken on or after August 1. Several of the recommended changes are discussed below.
Is the SEC process for SPAC registration statements Kafkaesque?
“Statement Regarding SPAC Matter,” is the latest from SEC Commissioner Hester Peirce. Seems completely anodyne, doesn’t it? But, as they say, looks can be deceiving. Instead, it’s a withering criticism of the SEC’s failure to declare a SPAC registration statement effective in time to allow a de-SPAC merger to go forward, implicitly suggesting at the end that the SEC may have displayed a lack of good faith in its Kafkaesque process (her metaphor, not mine), which had the effect of stringing the registrant along for many months until it was too late to go forward and liquidation was the only possible result. Peirce presumes the failure to declare effectiveness was based on the SEC’s “newfound hostility to SPAC capital formation.” Of course, as none of the correspondence with the SEC has been posted, we really have no independent information about what happened or precisely why the registration statement was not declared effective; it’s certainly possible that the deal was more thorny than the norm. Peirce calls SEC “inaction on a request for acceleration of the effective date of a registration statement…highly unusual.” But then, so is her statement.
Raiding the cookie jar—“part of the art of the close”?
In this Order, the SEC brought settled charges against Rollins, Inc., a termite and pest control company—think “Orkin”—and its former CFO for earnings management. In essence, the SEC alleged that the company adjusted the amounts in several of its corporate reserves, without support or documentation, to bump up its EPS so that its EPS would meet analysts’ consensus EPS estimates for two quarters. The company would otherwise have missed those consensus estimates by a penny in each quarter. The SEC charged the company with securities fraud under the Securities Act, financial reporting violations under the Exchange Act and failure to maintain adequate internal accounting controls and imposed a civil penalty of $8 million. The CFO was also charged with similar violations and ordered to pay a civil penalty of $100,000. According to Gurbir Grewal, Director of Enforcement, “[t]his is the fourth action and the highest penalty to date against an issuer in connection with the Division of Enforcement’s highly successful and continuing EPS Initiative, which uses data analytics to uncover hard-to-detect accounting and disclosure violations by public companies….The SEC staff’s ever-increasing sophistication with data made today’s action possible and underscores that we will continue to pursue public companies that lack adequate accounting controls and engage in improper earnings management practices.”
PCAOB talks to audit committee chairs about auditor oversight in 2021
Since 2019, as part of its strategy of enhancing transparency and accessibility through proactive stakeholder engagement, the PCAOB has been engaging with audit committee chairs at U.S. public companies that have had audits inspected by the PCAOB during the year. The PCAOB staff continued this outreach to audit committee chairs during 2021, engaging in conversations with over 240 audit committee chairs. The results are discussed in this new report. The discussions involved required communications between the auditor with the audit committee and discussions outside of required communications, auditor strengths and weaknesses, PCAOB inspection reports, quality control, use of technology and matters outside of the financial statements. The PCAOB believes that the audit committee’s oversight of the auditor and the audit process is a critical job. Accordingly, “engaged and informed audit committees can be a force for elevating audit quality to the benefit of investors and our capital markets broadly.”
Is the SEC’s new climate proposal within the traditions of the SEC disclosure regime?
Earlier this week, SEC Chair Gary Gensler gave the keynote address for an investor briefing on the SEC Climate Disclosure Rule presented by nonprofit Ceres. In his remarks, entitled “Building Upon a Long Tradition,” Gensler vigorously pressed his case that the SEC’s new climate disclosure proposal (see this PubCo post, this PubCo post and this PubCo post) was comfortably part of the conventional tapestry of SEC rulemaking. Growing out of the core bargain of the 1930s that let investors “decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures,” Gensler observed, the SEC’s disclosure regime has continually expanded—adding disclosure requirements about financial performance, MD&A, management, executive comp and risk factors. Over the generations, the SEC has “stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions.” As has been the case historically, the SEC, he insisted, “has a role to play in terms of bringing some standardization to the conversation happening between issuers and investors, particularly when it comes to disclosures that are material to investors.” The proposed rules, he said, “would build on that long tradition.” But has everyone bought into that view?
Audit Analytics reports on cybersecurity disclosure
These days, with our government warning regularly about the likelihood of breaches in cybersecurity, concerns about cyber threats have only multiplied. Introducing the SEC’s new proposal for cybersecurity disclosure in March (see this PubCo post), SEC Corp Fin Director Renee Jones said that, in today’s digitally connected world, cyber threats and incidents pose an ongoing and escalating threat to public companies and their shareholders. In light of the pandemic-driven trend to work from home and, even more seriously, the potential impact of horrific global events, cybersecurity risk is affecting just about all reporting companies, she continued. While threats have increased in number and complexity, Jones said, currently, company disclosure about cybersecurity is not always decision-useful and is often inconsistent, not timely and sometimes hard for investors to locate. What’s more, some material incidents may not be reported at all. Audit Analytics has just posted a new report regarding trends in cybersecurity incident disclosures. The report indicates that, in 2021, there was a 44% increase in the number of breaches disclosed, from 131 in 2020 to 188 in 2021, the most breaches disclosed in a single year since 2011. And, since 2011, the number of cybersecurity incidents disclosed annually has increased nearly 600%. Interestingly, however, in 2021, only 43% of cybersecurity incidents were disclosed in SEC filings, the report said.
Biden to nominate two new SEC Commissioners
According to a statement from the White House, President Biden is planning to nominate two new SEC commissioners, Democrat Jaime Lizárraga to fill the seat of departing Commissioner Allison Herren Lee (see this PubCo post), and Republican Mark Uyeda to fill the seat recently vacated by former Commissioner Elad Roisman (see this PubCo post). The statement indicates that Lizárraga serves as a Senior Advisor to House Speaker Nancy Pelosi, where he “oversees issues relating to financial markets, housing, international financial institutions, immigration, and small business policy.” Mark Uyeda has been a career attorney at the SEC for 15 years, but is currently detailed to the Senate Committee on Banking, Housing, and Urban Affairs, where he serves as Securities Counsel on the Committee’s Minority Staff. Both nominations are subject to Senate confirmation.
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