In Case You Missed It - Interesting Items for Corporate Counsel - September 2018

by Stoel Rives LLP
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  1. Much has been written about what on earth Elon Musk was thinking when he tweeted last month: “Am considering taking Tesla private at $420. Funding secured.” The tweet led to a 9% spike in Tesla’s stock price and to a temporary halt to Tesla stock trading. For securities law wonks, the focus has been whether the tweet violated Regulation FD (“Fair Disclosure”), which prohibits the intentional release of material non-public information selectively to specified groups that may most easily reap financial gain from the information (analysts, institutional investors, and shareholders), and whether the tweet was materially misleading in violation of Securities Exchange Act Section 10(b).
    • On the Regulation FD issue, almost certainly there was no violation. As noted here, Tesla arguably announced that people should follow Musk’s twitter feed if they wanted to be kept up to date and, even without that, the fact that Musk apparently has 22 million twitter followers suggests his tweets are sufficiently public.
    • On the 10(b) claim, Musk has a problem and, not surprisingly, class action claims (see here) and an SEC investigation (see here) were not long in coming.
    Tesla’s lawyers (presumably) went into damage control mode almost immediately after the tweet, ghost-writing (presumably) a calming statement to Tesla employees (here) and, a few days later, a statement (here) claiming that the tweet was Musk’s way of complying with Regulation FD (see “Why did I make a public announcement?”) and explaining why the tweet wasn’t misleading (see “What happened so far?” and “Why did I say ‘funding secured’”). Time will tell whether the statement reflects reality, and whether that reality was accurately captured in Musk’s tweet, or whether it’s a self-serving post hoc rationalization of an ill-conceived tweet.

    It has certainly been a rough month for Musk, which included a steep Tesla stock price drop after its CFO quit and after Musk smoked pot during a live YouTube interview (see here). To the extent Musk is tired of the negative limelight, though, he must take at least some comfort knowing:
     
    • If you Google “Egomaniac’s asinine tweet”, he likely doesn't even crack the top 1,000,000 results.
    • It’s only a matter of time before a Google search for “Musk disaster” consistently yields this as its top result.
  2. Depending largely on your political views, a California bill presented to the Governor for signature on September 10 is poised to strike a long-overdue blow for gender equality or to cement California as the poster child for state over-reach in private business affairs. Senate Bill 826 (here), would mandate that women serve on the board of each public company with its principal executive office in California. The mandate would phase in – one woman must be on the board by the end of 2019 and, by the end of 2021, women must comprise at least 1 of 4 or fewer, 2 of 5, or 3 of 6 or more directors. SB-826 detractors cast it as unnecessary, pointing to private efforts to recruit female board members and to push for board diversity, and unlawful under the U.S. and California constitutions and the California civil code. Media coverage of SB-826 is here, here, here.
  3. California’s bill gives a nice segue to environmental, social and governance (ESG) issues generally. A few items:
    • Ceres’ nagging survey, Disclose What Matters, which analyzes the sustainability disclosures of the world’s largest companies, is here.
    • A brief guide about responding to requests from ESG surveys is here.
    • A report on ESG reporting fatigue is here.
    • A suggestion that time and effort spent on ESG disclosures will result in garbage ESG ratings in any case is here.
    • Commentary on Delaware’s voluntary sustainability certification law, a type of voluntary reporting system any Delaware entity can opt into, is here (the law, which takes effect October 1, is here).
  4. The SEC continues to do very little, but not nothing. It recently:
    • Eliminated “redundant, overlapping, outdated, or superseded” disclosure requirements, here. (Helpfully, the SEC also published a redline version that shows the actual rule changes, here.)
    • Issued a concept release and request for comment, here, about expanding and simplifying the registration or exemption of securities under compensatory plans (Form S-8 and Rule 701).
    • Amended Rule 701(e), here, to raise the threshold that triggers additional disclosures to investors from $5 to $10 million in aggregate securities sales in a 12-month period.
    • Amended the definition of “smaller reporting company,” here, to include registrants with a public float of less than $250 million.
    • Proposed rules to tinker with the SEC’s whistleblower bounty program, here.
    • Foreshadowed, in a speech by SEC Chair Clayton, here, ways the SEC plans to help companies raise capital, including forthcoming modifications to auditor attestations of internal controls under Section 404(b) of the Sarbanes-Oxley Act.
    Last week, the U.S. Senate confirmed SEC Commissioner Elad Roisman, bringing the SEC Commission to a full five members at least until the end of the year, when Commissioner Stein is slated to end her term. Does this herald more action at the SEC? Probably not.
  5. Davis Polk published its annual survey of corporate governance practices in IPOs, here, despite that such things are becoming increasingly unimportant, apparently, given the decline in the number of public companies generally (see here). Proviti’s annual report benchmarking SOX costs, hours and controls, here, (spoiler alert: “still high”) doesn’t help. (But see here for a positive view of trends in the last few quarters.)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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