Board diversity statute for “underrepresented communities” held unconstitutional under California’s equal protection provisions
On April 1, the L.A. County Superior Court granted the plaintiffs’ motion for summary judgment in Crest v. Padilla, the taxpayer litigation challenging AB 979, California’s board diversity statute for “underrepresented communities.” (See this PubCo post.) Unfortunately, at the time, only a minute order was released, which did not offer any explanation of the Court’s reasoning. Now, a new 24-page Court Order, which provides the Court’s reasoning, has been made available, and, in it, the Court concludes that the statute, Corporations Code § 301.4, violates the equal protection clause of the California Constitution on its face. Why? Because, in the Court’s view, § 301.4 treats similarly situated individuals differently based on suspect racial and other categories that are not justified by a compelling interest, nor is the statute narrowly tailored to address the interests identified. Will this case have a spillover effect on the decision currently pending of plaintiffs’ taxpayer challenge to California’s board gender diversity statute, SB 826? According to Reuters, the California State Senator who authored SB 826 said that “the case involved a ‘very different set of facts and distinctly different legal issues.’”
What’s happening with corporate political spending disclosure?
I have to admit I was surprised to read that, in the new $1.5 trillion budget bill, Congress has once again prohibited the SEC from using any funds for political spending disclosure regulation. But there it is—Section 633—in black and white: “None of the funds made available by this Act shall be used by the Securities and Exchange Commission to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.” That means that, for now anyway, private ordering—through shareholder proposals at individual companies and other forms of stakeholder pressure, including humiliation—will continue to be the pressure point for disclosure of corporate political contributions. Those proposals have grown increasingly successful in the last couple of years. And, notably, it appears that the focus of many proposals has shifted recently, with more emphasis on apparent conflicts between stated company policies and values and the beneficiaries of those political contributions.
Court grants summary judgment to plaintiffs challenging California’s board diversity statute for “underrepresented communities”
As you may recall, SB 826, the California board gender diversity statute, is not the only California board diversity statute facing legal challenges. In 2020, AB 979, California’s board diversity statute for “underrepresented communities,” patterned after the board gender diversity statute, was signed into law, and it too has been facing legal challenges—in fact litigation brought by the same plaintiffs on the same legal basis. (See this PubCo post.) Framed as a “taxpayer suit” much like Crest v. Padilla I, the sequel, Crest v. Padilla II, sought to enjoin Alex Padilla, the then-California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law and a judgment declaring the diversity mandate to be unlawful in violation of the California constitution. As Crest v. Padilla I is awaiting a court decision following a bench trial (see this PubCo post), what’s happening in the sequel? After a hearing on motions by both parties for summary judgment in March, the Los Angeles Superior Court took the matter under submission and, on April Fool’s Day, the Court issued its order. But it was no joke—the Court granted plaintiff’s motion for summary judgment. The state has not yet indicated whether it will appeal the decision. In a statement, the president of Judicial Watch, which represented the plaintiffs, said that “[t]his historic California court decision declared unconstitutional one of the most blatant and significant attacks in the modern era on constitutional prohibitions against discrimination.”
New SEC proposal takes on SPACs
Yesterday, the SEC voted, three to one, to propose new rules and amendments regarding SPACs, shell companies, the use of projections in SEC filings and a rule addressing the status of SPACs under the Investment Company Act of 1940. The proposal arrives in the context of calls from various corners, including from SEC Chair Gary Gensler and former Acting Corp Fin Director John Coates, to treat SPACs as an alternative method of conducting an IPO under the SEC’s policy framework. (See this PubCo post, this PubCo post and this PubCo post.) And let’s not forget the extensive recommendations from the SEC’s Investor Advisory Committee addressing SPAC regulatory and investor protection issues that have been under scrutiny. (See this PubCo post.) These investor protection concerns were exacerbated as a result of the proliferation of SPACs in 2020 and 2021—raising $83 billion in 2020 and $160 billion in 2021 and, in those same two years, constituting more than half of all IPOs, according to the proposing release. (Note, however, that this volume has not been sustained this year; according to Bloomberg, only $8.9 billion has been raised in 2022, “a fraction of the 279 deals raking in $93 billion during the same period last year.”) These concerns made SPACs an alluring target for SEC rulemaking, and the SEC has approached it with another enormous effort—literally—issuing a proposal of almost 400 pages. It must be a record—a second proposal in just over a week that would add an entirely new subpart to Reg S-K!
Corp Fin issues new M&A-related CDIs
Last week, the SEC issued a number of new CDIs related primarily to M&A transactions, including Forms 8-K, communications under Rule 14a-12, and, in the context of de-SPAC transactions, the Rule 14e-5 prohibition of purchases outside of a tender offer.
SEC proposes new rules on climate disclosure [UPDATED—PART II—GHG emissions]
[This post is Part II of a revision and update of my earlier post that primarily reflects the contents of the proposing release. Part I (here) covered the background of the proposal and described the SEC’s proposed climate disclosure framework, including disclosure of climate-related risks, governance, risk management, targets and goals, financial statement metrics and general aspects of the proposal. This post covers GHG emissions disclosure and attestation.]
So, what are the GHG emissions for a mega roll of Charmin Ultra Soft toilet paper? That was the question I asked to open this PubCo post. According to this article in the WSJ, the answer was 771 grams, a calculation performed by the Natural Resources Defense Council. But how did they figure that out? How public companies could be required to calculate and report on their GHG emissions is one of the major issues addressed by the SEC in its proposal on climate-related disclosure regulation issued last week. The proposal was designed to require disclosure of “consistent, comparable, and reliable—and therefore decision-useful—information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.” Drawing on the Greenhouse Gas Protocol, the proposal would, in addition to the disclosure mandate discussed in Part I of this Update, require disclosure of a company’s Scopes 1 and 2 greenhouse gas emissions, and, for larger companies, Scope 3 GHG emissions if material (or included in the company’s emissions reduction target), with a phased-in attestation requirement for Scopes 1 and 2 data for large accelerated filers and accelerated filers. The disclosure would be included in registration statements and periodic reports in the section captioned “Climate-Related Disclosure.” At 510 pages, the proposal is certainly thoughtful, comprehensive and stunningly detailed—some might say overwhelmingly so. If adopted, it would certainly require a substantial undertaking for many companies to get their arms around the extensive and granular requirements and comply with the proposal’s mandates. How companies would manage this enormous effort remains to be seen.
SEC (finally) proposes new rules on climate disclosure [UPDATED—PART I]
[This post is Part I of a revision and update of my earlier post primarily reflecting the contents of the proposing release. This post covers background and describes various aspects of the proposal other than the sections on GHG emissions disclosure and attestation, which will be covered in a separate post early next week.]
The SEC describes it modestly as a proposal to “enhance and standardize registrants’ climate-related disclosures for investors.” The WSJ called it “the biggest potential expansion in corporate disclosure since the creation of the Depression-era rules over financial disclosures that underpin modern corporate statements,” and Fortune said it “could be the biggest change to corporate disclosures in the U.S. in decades.” But now you can judge for yourself, after the SEC voted earlier this week, three to one, to propose new rules on climate disclosure regulation. The proposal was designed to require disclosure of “consistent, comparable, and reliable—and therefore decision-useful—information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.” The proposal would require public companies to disclose information about climate-related risks that are reasonably likely to have a material impact on their businesses, results of operations or financial condition, as well as information about the effect of climate risk on companies’ governance, risk management and strategy. The disclosure, which would be included in registration statements and periodic reports, would draw, in part, on disclosures provided for under the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. Compliance would be phased in, with reporting for large accelerated filers due in 2024 (assuming an—optimistic—effective date at the end of this year). The proposal would also mandate disclosure of a company’s Scopes 1 and 2 greenhouse gas emissions, and, for larger companies, Scope 3 GHG emissions if material (or included in the company’s emissions reduction target), with a phased-in attestation requirement for Scopes 1 and 2 data for large accelerated filers and accelerated filers. The proposal would also require disclosure of certain climate-related financial metrics in a note to the audited financial statements. At 510 pages, the proposal is certainly thoughtful, comprehensive and stunningly detailed—some might say overwhelmingly so. If adopted, it would surely require a substantial undertaking for many companies to get their arms around the extensive and granular requirements and comply with the proposal’s mandates. How companies would manage this enormous effort remains to be seen.
SEC (finally) proposes new rules on climate disclosure
“Highly anticipated” is surely an understatement for the hyperventilation that has accompanied the wait for the SEC’s new proposal on climate disclosure regulation. The proposed rulemaking has been a subject of conjecture for many months, and internal squabbles about where the proposal should land have leaked to the press. (See this PubCo post.) As one of those hyperventilators, I’ve been speculating for months about what it might include, what it might exclude. Would it require disclosure of Scope 3 GHG emissions? Would a particular framework be selected or endorsed? Would the framework sync up with international standards or, if not, how would they overlap or conflict? Would the framework be industry-specific? Would scenario analyses be mandated? Would companies be required to obtain third-party attestation or other independent assurance? Would reporting be scaled? There were a lot of questions. Now, we finally know at least some of the preliminary answers: yesterday, the SEC voted, three to one, to propose new rules requiring public companies to disclose information about the material impact of climate on their businesses, as well as information about companies’ governance, risk management and strategy related to climate risk. The disclosure, which would be included in registration statements and periodic reports, would draw, in part, on disclosures provided for under the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. Compliance would be phased in, with reporting for large accelerated filers due in 2024 (assuming an—optimistic—effective date at the end of this year). The proposal would also mandate disclosure of a company’s Scopes 1 and 2 greenhouse gas emissions, and, for larger companies, Scope 3 GHG emissions if material (or included in the company’s emissions reduction target), with a phased-in attestation requirement for Scopes 1 and 2 for large accelerated filers and accelerated filers. The proposal would also require disclosure of certain climate-related financial metrics in a note to the audited financial statements. For some, a sigh of relief, for others, not so much.
SEC’s climate proposal—SCOOP!
According to exclusive reporting from Bloomberg, the SEC’s new proposal for climate disclosure regulation—scheduled for a vote and release on Monday—will include a requirement to disclose some Scope 3 emissions, that is “greenhouse gases that are generated by other firms in [a company’s] supply chain or by customers using [its] products.” It’s widely believed that Scope 3 emissions “make up the bulk” of most companies’ emissions. It’s unclear whether the proposed requirement would apply to all public companies or just larger ones, or whether the requirement might be phased in. As discussed below, whether or not to require disclosure of Scope 3 emissions has been a subject of heated internal debate at the SEC, and, the article suggests, the proposal appears to reflect some compromise.
Corp Fin Director discusses changes to guidance on shareholder proposals
In remarks earlier this month to the Council of Institutional Investors, Corp Fin director Renee Jones discussed Corp Fin’s reevaluation of the no-action process for shareholder proposals under Rule 14a-8. In particular, she provided some insight into the staff’s issuance, in November 2021, of new Staff Legal Bulletin No. 14L, which outlined Corp Fin’s most recent interpretations of Rule 14a-8(i)(7), the ordinary business exception, and Rule 14a-8(i)(5), the economic relevance exception, and rescinded three earlier SLBs—SLBs 14I, 14J and 14K—following a “review of staff experience applying the guidance in them.” Generally, new SLB 14L presented its approach as a return to the perspective that historically prevailed prior to the issuance of the three rescinded SLBs. (See this PubCo post.) The effect of SLB 14L was to make exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies, smoothing the glide path for inclusion of proposals submitted by climate and other activists. Jones explains why Corp Fin believed that SLB 14L was advisable. She also shares some statistics about the current proxy season.
You must be logged in to post a comment.