Darrick M. Mix – Duane Morris on Capital Markets

March 22, 2022 by Darrick M. Mix

SEC Proposes Climate Disclosure Rules for Public Companies

On March 21, 2022, the Securities and Exchange Commission proposed, in a 510-page release, rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions. The commissioners voted on party lines to approve the proposal on a three to one vote.

SEC Chair Gary Gensler commented that “if adopted, [the rule changes] would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.” Mr. Gensler believes that the proposal would help issuers more efficiently and effectively disclose climate risks and meet investor demand and that “companies and investors alike would benefit from the clear rules of the road proposed in the release.”

Republican SEC Commissioner Hester Peirce voted against the proposal and issued a dissenting statement. “We are here laying the cornerstone of a new disclosure framework that will eventually rival our existing securities-disclosure framework in magnitude and cost, and probably outpace it in complexity,” Ms. Peirce said. She also warned that the proposed rules will enrich “the climate-industrial complex” while hurting investors, the economy and the SEC.

The proposed rule changes would require a registrant to disclose information about:

the registrant’s governance of climate-related risks and relevant risk management processes;
how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term;
how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and
the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

For registrants that already conduct scenario analysis, have developed transition plans, or publicly set climate-related targets or goals, the proposed amendments would require certain disclosures to enable investors to understand those aspects of the registrants’ climate risk management.

In what is likely to be a more burdensome and costly disclosure requirement, the proposed rules also would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1), indirect emissions from purchased electricity or other forms of energy (Scope 2), and GHG emissions from upstream and downstream activities in its value chain (Scope 3). Disclosure of Scope 3 emissions would be mandatory only if output of GHG is material, or significant to investors, or if companies outline specific targets for them. According to the SEC, these proposals for GHG emissions disclosures would provide investors with decision-useful information to assess a registrant’s exposure to, and management of, climate-related risks, and in particular transition risks. Adding to the cost of these requirements, accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering Scopes 1 and 2 emissions disclosures.

The proposing release will be open for public comment for a relatively short period of 30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on sec.gov, whichever period is longer.

August 4, 2020 by Darrick M. Mix

SEC Adopts Final Amendments to Proxy Rules on Proxy Voting Advice

On July 22, 2020, the U.S. Securities and Exchange Commission adopted amendments to its rules under the Securities Exchange Act of 1934 that exempt persons furnishing proxy voting advice from the information and filing requirements of the federal proxy rules. The most prominent proxy advisory firms that provide such proxy voting advice in the United States today are Institutional Shareholder Services and Glass Lewis & Co. Pursuant to the amendments, the SEC codified its view that proxy voting advice generally constitutes a “solicitation,” imposed new conditions to exemptions under Exchange Act Rule 14a-2(b) and added examples of what may be “misleading” within the meaning of Exchange Act Rule 14a-9. The SEC also published supplemental guidance to assist investment advisers on assessing how to consider registrant responses to proxy voting advice in light of the new amendments to the proxy rules.

The new rules have the potential to alter the dynamics between public companies and proxy advisory firms, with public companies gaining some leverage. The new rules have been criticized by some industry participants with an interest in maintaining the prior system.

Duane Morris’ client alert on these new rules was issued on July 30, 2020 and is available here.

May 22, 2020May 22, 2020 by Darrick M. Mix

SEC Adopts Amendments to Financial Reporting Requirements in Acquisitions and Dispositions of Businesses

Yesterday, May 21, 2020, the Securities and Exchange Commission announced that it approved amendments to its rules and forms “to improve for investors the financial information about acquired or disposed businesses, facilitate more timely access to capital, and reduce the complexity and costs to prepare the disclosure.” The 267-page final rule release is available by clicking here.

The amendments update SEC rules which have not been comprehensively addressed since their adoption, some over 30 years ago. Jay Clayton, the SEC’s Chairman, said that amendments are “designed to enhance the quality of information that investors receive while eliminating unnecessary costs and burdens [and] will benefit investors, registrants and the market more generally.”

Among other things, the amendments:

update the significance tests (i.e., to determine when financial statements regarding an acquisition or disposition must be included) in Rule 1-02(w) and elsewhere by revising the investment test to compare the registrant’s investments in and advances to the acquired or disposed business to the registrant’s aggregate worldwide market value if available; revising the income test by adding a revenue component; expanding the use of pro forma financial information in measuring significance; and conforming, to the extent applicable, the significance threshold and tests for disposed businesses to those used for acquired businesses;
modify and enhance the required disclosure for the aggregate effect of acquisitions for which financial statements are not required or are not yet required by eliminating historical financial statements for insignificant businesses and expanding the pro forma financial information to depict the aggregate effect in all material respects;
require the financial statements of the acquired business to cover no more than the two most recent fiscal years;
permit disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity;
permit the use of, or reconciliation to, International Financial Reporting Standards as issued by the International Accounting Standards Board in certain circumstances;
no longer require separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for nine months or a complete fiscal year, depending on significance; and
make corresponding changes to the smaller reporting company requirements in Article 8 of Regulation S-X, which will also apply to issuers relying on Regulation A.

The amendments will be effective on Jan. 1, 2021, but voluntary compliance will be permitted in advance of the effective date.

March 25, 2020 by Darrick M. Mix

SEC Announces Reporting Relief and Issues Guidance Regarding COVID-19

On March 25, 2020, the Securities and Exchange Commission announced that it is extending the filing periods covered by its previously enacted conditional reporting relief for certain public company filing obligations under the federal securities laws, and that it is also extending regulatory relief previously provided to funds and investment advisers whose operations may be affected by COVID-19. In addition, the SEC’s Division of Corporation Finance issued its current views regarding disclosure considerations and other securities law matters related to COVID-19.

Filing Deadline Relief for Public Companies

To address potential compliance issues, the SEC issued an order [https://www.sec.gov/rules/exorders/2020/34-88465.pdf] that, subject to certain conditions, provides public companies with a 45-day extension to file certain disclosure reports that would otherwise have been due between March 1 and July 1, 2020. This order supersedes and extends the SEC’s prior order of March 4, 2020. Among other conditions, companies must continue to convey through a current report (Form 8-K) a summary of why the relief is needed in their particular circumstances for each periodic report that is delayed. The SEC may provide extensions to the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant. The SEC encouraged companies and their representatives to contact SEC staff with questions or matters of particular concern.

Relief for Funds and Investment Advisers

The SEC also issued two orders [https://www.sec.gov/rules/other/2020/ia-5469.pdf and https://www.sec.gov/rules/other/2020/ic-33824.pdf] that provide certain investment funds and investment advisers with additional time with respect to holding in-person board meetings and meeting certain filing and delivery requirements, as applicable. These orders supersede and extend the filing periods covered by the SEC’s prior orders of March 13, 2020. Among other conditions, entities must notify the SEC and/or investors, as applicable, of the intent to rely on the relief, but generally no longer need to describe why they are relying on the order or estimate a date by which the required action will occur.

Disclosure Guidance for Public Companies

Further, the Division of Corporation Finance issued Disclosure Guidance Topic No. 9 [https://www.sec.gov/corpfin/coronavirus-covid-19] (the “Guidance”), providing the staff’s current views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19 and related business and market disruptions. The Division has been monitoring how companies are reporting the effects and risks of COVID-19 on their businesses, financial condition, and results of operations and is providing the Guidance as companies prepare disclosure documents during this uncertain time. In the Guidance, the Division reminds companies that a number of existing rules or regulations require disclosure about the known or reasonably likely effects of and the types of risks presented by COVID-19. As a result, disclosure of these risks and COVID-19-related effects may be necessary or appropriate in management’s discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements. The Guidance also poses a series of questions designed to help companies assess COVID-19-related effects and consider their disclosure obligations (for example: How has COVID-19 impacted your financial condition and results of operations? In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition? Do you expect that COVID-19 will impact future operations differently than how it affected the current period?)

The Guidance notes that companies and related persons to be mindful of their market activities, including the issuance or purchase of securities, in light of their obligations under the federal securities laws. For example, where COVID-19 has affected a company in a way that would be material to investors or where a company has become aware of a risk related to COVID-19 that would be material to investors, the company, its directors and officers, and other corporate insiders who are aware of these matters should refrain from trading in the company’s securities until such information is disclosed to the public. The Guidance also reminds companies of their obligations under Regulation FD to avoid selective disclosures.

January 15, 2019 by Darrick M. Mix

The Government Shutdown and Effectiveness of Registration Statements under Section 8(a)

Given the shutdown of the SEC as part of the wider government shutdown, we are seeing many registration statements being filed with no delaying amendment language and with the language required by Rule 473 to allow automatic effectiveness in 20 days in accordance with Section 8(a) of the Securities Act. In the last two weeks, at least 30 such registration statements have been filed. In all of 2018, there were only three such registration statements, and in all of 2017, there were only two. Obviously, the deals must go on, and corporate issuers and their counsel have seen the Division of Corporation Finance’s FAQs regarding Actions During Government Shutdown and have heeded the answers set forth therein. (For now, the FAQs are posted on the Division of Corporation Finance’s homepage.)

The first of these “automatically effective” registration statements filed in 2019 was on Form S-4 in connection with the pending merger of BSB Bancorp and People’s United Financial, Inc. Since then, issuers have filed these registration statements on Forms S-1, S-3 and S-4 in connection with a variety of transactions. If the government shutdown continues, we should expect to see many more of these filings.

October 4, 2018 by Darrick M. Mix

California Mandates Gender Diversity on Public Company Boards

California has become the first state in the nation to require public companies to put female directors on their boards. On September 30, 2018, Governor Jerry Brown signed a bill mandating that by the end of 2019 certain publicly traded companies with headquarters in the state appoint at least one woman to their boards. Further, by 2021, companies subject to the law with at least five directors will need to appoint at least two female directors to their boards, and those with at least six directors will need to appoint at least three female directors to their boards. Companies subject to the law that do not comply with the mandates will face financial penalties.

Whether the law is constitutional is questionable. Governor Brown acknowledged as much after he signed the bill, stating, “I don’t minimize the potential flaws that may indeed prove fatal to its ultimate implementation,” but he justified the law, stating that “recent events in Washington, D.C.—and beyond—make it crystal clear that many aren’t getting the message.” Opponents argue that the mandate violates both the California and U.S. Constitutions because it imposes impermissible gender quotas and requires companies to reject or replace men seeking to serve on boards. In addition, opponents claim that the law violates constitutional principles because it applies to companies headquartered in California even if they are incorporated in another state, creating an inherent conflict between California law and the corporate law of every other state.

Regardless of whether the California law is ultimately enforceable, there is no question that proxy advisory firms and some institutional investors like BlackRock remain focused on board diversity, including gender diversity, and there will continue to be pressure on public company boards to increase their diversity. Action by shareholders seeking to increase board diversity, rather than state governments mandating quotas, is likely to be more enduring and ultimately more successful.

December 15, 2014 by Darrick M. Mix

The Comverge Case: Fiduciary Duties and Break-up Fees in M&A

Our partner Richard Renck in Wilmington recently posted an entry on our Delaware Business Law Blog regarding the Comverge case decided last month by the Delaware Court of Chancery. Among other things, the Court’s opinion provides practitioners and clients with insight regarding break-up fees as well as a road map of how the Court of Chancery reviews challenges to third-party sale transactions, approved by a disinterested board, under the enhanced scrutiny of Revlon. Please see Richard’s post here.

July 24, 2013September 10, 2014 by Darrick M. Mix

Fifth Circuit to Dodd-Frank Whistleblowers: Call the SEC First

The U.S. Court of Appeals for the Fifth Circuit’s decision last week in Asadi v. G.E. Energy (USA) has been hailed as a triumph for employers because it requires whistleblowers who bring retaliation claims under the Dodd–Frank Wall Street Reform and Consumer Protection Act to show that they suffered retaliation because they reported potential violations to the U.S. Securities and Exchange Commission. The Fifth Circuit rejected the position adopted by the SEC in its regulations implementing Dodd-Frank and by the few district courts that have addressed the issue. That rejected approach interprets Section 922 of Dodd-Frank to apply its enhanced protections to certain whistleblowers even if they had not reported their concerns to the SEC. Although this decision narrows the category of employees who can seek the enhanced protections of Dodd-Frank, it will likely increase the number of whistleblowers who report their concerns to the SEC.

Our firm’s client alert regarding the case can be found here.

December 7, 2012September 10, 2014 by Darrick M. Mix

SEC Staff Issues Wells Notice to Netflix and Its CEO

The Wall Street Journal and other news outlets reported late yesterday that Netflix, Inc. filed a Form 8-K disclosing that each of Netflix and its CEO, Reed Hastings, had received a Wells notice from the staff of the Securities and Exchange Commission relating to an alleged violation of Regulation Fair Disclosure (FD) in connection with a Facebook post by Hastings on July 3, 2012. Hastings’ Facebook post stated that “Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we’ll blow these records away.”

Continue reading “SEC Staff Issues Wells Notice to Netflix and Its CEO”

September 14, 2012September 10, 2014 by Darrick M. Mix

SEC Rule Proposal Would Permit Public Offerings in “Private Placements” and Facilitate Capital Formation

As required by the JOBS Act, the U.S. Securities and Exchange Commission has proposed rules to eliminate the prohibition on general solicitation and general advertising in private placements exempt from registration by Rule 506 under the Securities Act of 1933, as long as all purchasers of the securities are accredited investors. The elimination of the prohibition on general solicitation and general advertising will result in issuers being able to attract a wider variety of investors with less cost. Increased competition for quality investments could also improve terms for issuers, reducing their cost of capital.

The firm’s client alert regarding the SEC’s proposal may be accessed here.