In Case You Missed It - Interesting Items for Corporate Counsel - December 2022

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  1. The SEC adopted final Rule 10b5-1 changes, here. The rule changes follow piles of published research suggesting that 10b5-1 plan trades are more advantageous for insiders than they should be, statistically speaking. As a brief refresher, a 10b5-1 plan hands over control of an insider’s trading decisions, within parameters, to an outsider to establish an affirmative defense against claims that trades are made “on the basis of material nonpublic information.” The SEC rules track a well-worn path of suggested practices designed to ensure an insider isn’t gaming the use of 10b5-1 plans: limits on overlapping plans and cooling off periods between plan adoption and implementation, plus required representations from insiders for good measure. A redline showing changes to Rule 10b5-1 is here. The rules also require quarterly disclosures of 10b5-1 plan use, that a company’s insider trading policies and procedures be filed as an exhibit to the annual report, additional proxy statement disclosure about plan transactions, that bona fide gifts be reported on Form 4 rather than Form 5, and a check-the-box disclosure on Forms 4 and 5 if trades are made under a 10b5-1 plan. The SEC’s summary of its new rules, here, is as good as any out there. The new 10b5-1 trading plan requirements will kick in 60 days after the final rule is published in the Federal Register (start rolling them out now for new plans!), start ticking the box on Forms 4/5 for filings after April 1, 2023, and be aware that new Exchange Act disclosures will be effective at the beginning of the first full fiscal year that begins after April 1, 2023 (year-end filers must start complying January 1, 2024). Companies might consider adding a question to their D&O Questionnaires regarding an insider’s use of a trading plan, although waiting until next year is likely what most will do.
  2. Related to insider stock transaction, the SEC reopened (here) its comment period on proposed rules to require additional issuer share repurchase disclosures, including one-day reporting on new Form SR.
  3. The SEC also issued:
    • Seven new non-GAAP financial measure CDIs (100.01, .04-.06, .10(a-c)), available here (a useful blackline that shows what changed is here); and
    • Three new universal proxy access CDIs (139.04-.06) here.
  4. Nasdaq filed rule changes with the SEC, here, modifying the compliance date for board diversity requirements (the disclosures that you have the specified number of diverse directors or explain why you do not, not the board diversity matrix), generally pushing compliance dates from August 30 to December 31 of the same compliance year. We are still following the travails of California’s board diversity law—the most far-reaching law we’re aware of—which recently was stayed (again) and which probably is unconstitutional. See here.
  5. Institutional Shareholder Services announced its 2023 proxy voting policy updates, here, and Blackrock announced its policies here.
  6. Elizabeth Holmes, the Silicon Valley Supervillain CEO of Theranos, was sentenced to 11.25 years in federal prison. In case you’re wondering how that stacks up to “typical” sentences, an article is here. The view that Holmes’ sentence was too harsh because it's not like she killed anyone, always a (non) killer defense in a securities fraud claim, is here. Although Holmes may yet appeal, and need not report to prison until April 2023, presumably the verdict represents the wholly predictable conclusion of her trial. Because every story about Theranos questions how on earth anyone can differentiate between Silicon Valley puffery and securities fraud (see, e.g., here, here and here), a simplified guide:

    “Our company is going to change the industry!” = OK
    “Our products work.” = Not OK

    Similarly simple are the corporate governance lessons learned from the collapse of FTX, here: don’t embezzle.

  7. In other crypto-currency related news, the SEC posted a sample comment letter, here, as general guidance admonishing public companies to adequately disclose their exposure to crypto volatility. That is, of course, separate and aside from the ongoing debate on whether various forms of crypto are currencies or securities subject to regulation. “It depends,” according to the SEC (see here, here, and here). The uncertainty and limited SEC guidance (see here) led a crypto-currency law firm to file a lawsuit, here, asking that a federal district court declare that Ether Digital Currency Units are not securities subject to SEC regulation. (Most would have drafted a no-action letter rather than take a stab at a declaratory judgment, so unless someone points out an obvious justification for this tactic, we’re simply chalking it up to the kind of weirdo thing a crypto-currency law firm would do.)
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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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