Welcome to Saul Ewing’s Public Companies Quarterly Update series. Our intent is to, on a quarterly basis, highlight important legal developments of which we think public companies should be aware. This edition is related to developments during the first quarter of 2024.

What You Need to Know:

• The Securities and Exchange Commission (“SEC”) adopted final climate-related disclosures rules; Fifth Circuit stays implementation but all companies should start planning for future compliance now.
• The SEC adopted new disclosure rules and additional guidance related to SPAC initial public offerings and de-SPAC transaction.
• The SEC’s Division of Corporation Finance has issued updated guidelines on Confidential Treatment Requests.
• The husband of a BP M&A manager pleads guilty to insider trading on the basis of material nonpublic information that he obtained by eavesdropping on his wife’s work calls.
• The SEC charged a former CEO with fraud on the basis of statements he made on social media.
• A recent speech by Chairman Gensler, as well as two recent enforcements, underscores the SEC’s focus on transparency around the use of AI in financial markets.
• ExxonMobil’s lawsuit against activist shareholders challenges SEC guidance on shareholder proposals.

SEC Adopts Final Rules on Enhancement and Standardization of Climate-Related Disclosures; Sued Immediately

On March 6, 2024, the Securities and Exchange Commission (“SEC”) adopted final rules requiring public companies to disclose delineated climate-related information in registration statements and annual reports. The SEC originally proposed these rules on March 21, 2022. Numerous suits were immediately filed to enjoin enforcement of the rules, despite the fact that the compliance dates for the rules phase-in over time, beginning in two years and, at that time, only for the larger accelerated issuers. On June 15th, the U.S. Court of Appeals for the Fifth Circuit issued an administrative stay temporarily blocking the SEC’s implementation of the new rules pending the court’s final decision of the plaintiff’s issues.

Under the final rules as enacted, companies are required to disclose, among other things:

• material climate-related risks;
• activities undertaken to mitigate or adapt to such risks; 
• information about the company’s board of directors’ oversight of climate-related risks and management’s role in managing material climate-related risks; and
• information on any climate-related targets or goals that are material to the company’s business, results of operations, or financial condition.

The final rules require certain large, accelerated filers and accelerated filers to disclose material Scope 1 and/or Scope 2 greenhouse gas (GHG) emissions and provide assurance reports from a qualified third-party provider. The assurance report needs to be at the limited assurance level; provided that, after a transitional period, the assurance report will need to be at the reasonable assurance level for large, accelerated filers.

Companies are also required to disclose in the notes to financial information capitalized costs, expenditures expensed, and charges and losses incurred as a result of severe weather events and natural conditions, including hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures and rising sea levels. Capitalized costs, expenditures and losses related to carbon offsets and renewable energy credits or certificates also need to be disclosed in financial statement notes if such offsets, credits or certificates are used as a material component of a company’s plans to achieve climate-related targets or goals.

If the estimates and assumptions a company uses in its financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any climate-related targets or transition plans, companies are required to include a qualitative description in a note to their financial statements as to how the development of such estimates and assumptions was impacted. 

The climate-related disclosures will need to be filed either in a separate, appropriately captioned section of registrations statements and annual reports or in another appropriate section of the filings, such as Risk Factors, Description of Business, or Management’s Discussion and Analysis. Disclosures will need to be electronically tagged in XBRL. Disclosures can be incorporated by reference from other filings as long as the disclosures meet the electronic tagging requirements.

The SEC also included in the new rules a safe harbor from private liability for climate-related disclosures (other than historical facts) related to transition plans, scenario analysis, the use of an internal carbon price, and targets and goals.

Changes From Proposal

The SEC received extensive feedback on the March 2022 proposed rules and responded to the feedback with a number of changes. Most notably, the SEC provided that Scope 1 and Scope 2 GHG emissions only need to be disclosed if material and eliminated entirely the requirement to disclose Scope 3 GHG emissions. The final rules also give companies until the due date for their second quarterly report on Form 10-Q for disclosing the prior year’s Scope 1 and Scope 2 emissions. The final rules exempted smaller reporting companies, emerging growth companies and nonaccelerated filers from the GHG emissions and related assurances. The final rule did not include the proposed rule’s requirement that financials statement impacts be evaluated on a line-by-line basis, but instead require disclosure of amounts reflected directly in the financial statements when such aggregate amounts exceed one percent of pretax income or total shareholders’ equity, subject to a de minimis threshold.

SEC Compliance Deadlines

Compliance with the rules is phased-in for different companies depending on their size. The earliest compliance periods—for large, accelerated filers—for some of the rules, begins as of the reporting for fiscal year 2025 with GHG disclosures and some other rules not phasing-in until the reporting for fiscal year 2026 (with limited assurances not required until fiscal year 2029 and reasonable assurances not required until fiscal year 2033). Accelerated filers (other than smaller reporting companies and emerging growth companies) are not required to comply generally until fiscal year 2026, with some rules extended to fiscal year 2027 and GHG emission disclosures not required until fiscal year 2028, with limited assurances required in fiscal year 2031. Smaller reporting companies, emerging growth companies and non-accelerated filers generally are not required to comply until reporting for fiscal year 2027, with other rules beginning in fiscal year 2028 and such companies are exempt from the GHG emission requirements. Electronic tagging for non-financial statement information is required as of fiscal years beginning in 2026 for large, accelerated filers and accelerated filers (other than small reporting companies and emerging growth companies) and in 2027 for the others. 

Challenges to the Regulations

The final SEC rules were met immediately by legal challenges from both environmental advocates, arguing the rules were not comprehensive enough, and business and state governments arguing the SEC exceeded its authority in promulgating the rules that it did. As referenced above, on June 15th, in Liberty Energy vs. Securities and Exchange Commission, case number 24-60109, the U.S. Court of Appeals for the Fifth Circuit issued an administrative stay temporarily blocking the implementation of the new rules. Petitions have also been filed to block the new rules by Republican led states in the U.S. Courts of Appeal for the Fifth, Sixth, Eighth and Eleventh circuits. Separately, on March 13th, the Sierra Club sued the SEC in the D.C. Circuit claiming that the finalized rules failed to sufficiently shield investors from the risks of climate change. The Sierra Club’s main objection seems to be the omission of requirements regarding Scope 3 disclosures from the final rules. These various cases, and others that are likely to be filed, may affect the SEC’s ability and timing to implement the final rules. However, it is worth noting that since the rules were not intended to require compliance prior to fiscal year 2025, it is possible that some of the implementation issues may be settled by the courts in advance of that date.

What Companies Need to Start Thinking About Now

Although compliance with the new rules is phased-in starting two years from now, with some public companies not needing to comply at all until four years out, all companies should start considering what they need to do to comply now. Companies should:

• assess their climate-related disclosures, particularly related to risks, effects on the business and their activities and plans to manage those risks;
• assess and consider their climate-related targets and goals;
• for large, accelerated filers and non-exempt accelerated filers, create or assess processes to collect information about Scope 1 emissions and Scope 2 emissions and, where applicable, prepare for assurance report requirements;
• consider their financial controls regarding capturing the financial impact of weather events, carbon offsets and renewable energy credits or certificates; and
• institute and refine board oversight and management functions regarding climate matters, including evaluating the board’s and management’s expertise and relevant company resources with respect to climate issues.

Many larger companies have already begun to confront these issues, particularly where they are in jurisdictions or industries already subjecting them to climate-related regulations. However, smaller companies and companies in industries that have not historically been the targets of climate-related regulation are probably less prepared for implementing processes regarding these new SEC rules. Even companies that are currently subject to climate-related regulations are probably not yet prepared to address the specific requirements of these new SEC rules—which were not developed specifically to be consistent with existing regulations from other regulators. The SEC delayed the compliance deadlines to allow companies to adjust, but all companies should be planning for how they will comply now. Please reach out to any of the authors of this newsletter or your regular attorney contact at Saul Ewing for more information.

New SEC Disclosure Rules and Guidance Regarding SPAC Initial Public Offerings and de-SPAC Transaction

On January 24, 2024, the SEC adopted a number of final rules, and issued new and updated guidance, related to initial public offerings (“IPOs”) by special purpose acquisition companies (“SPACs”) and business combinations between SPACs and target companies (“de-SPACs”). 

Among other things, the new rules create a new Subpart 1600 (Special Purpose Acquisition Companies) of Regulation S-K which requires registration statements filed in connection with SPAC IPOs and de-SPAC transactions to include additional disclosure related to:

• Sponsors—Disclosure about (i) the persons who have direct and indirect material interests in the SPAC sponsor, as well as the nature and amount of their interests, (ii) the business and experience of the SPAC sponsor, its affiliates, and promoters, their material roles and responsibilities in directing and managing the SPAC’s activities, and the nature (e.g., cash, shares of stock, warrants and rights) and amount of compensation that they have been or will be awarded; (iii) agreements, arrangements or understandings between the SPAC sponsor and unaffiliated stockholders of the SPAC regarding redemptions, and (iv) material terms of any agreement, arrangement, or understanding, in tabular format, regarding restrictions on the resale of SPAC securities by the SPAC sponsor and its affiliates.
• Cover Page and Prospectus Summary—Disclosure on the cover page and in the prospectus summary of SPAC IPO and de-SPAC registration statements, about, among other things, the timeframe for a SPAC to consummate a transaction and whether it may be extended, redemptions, SPAC sponsor, its affiliates and promoter compensation, dilution, conflicts of interest, how the SPAC will identify and evaluate target companies, plans to seek additional financings and the terms of the trust or escrow account.
• Conflicts of Interest—Disclosure about actual or potential material conflicts of interest, as between: (i) the SPAC sponsor or its affiliates; the SPAC’s officers, directors, or promoters; or the target company’s officers or directors, on the one hand; and (ii) the unaffiliated stockholders of the SPAC, on the other hand, including those that may arise (a) in determining whether to proceed with a de-SPAC transaction, (b) from the manner in which the SPAC compensates its sponsor, officers or directors, or (c) from the manner in which the sponsor compensates its officers and directors.
• Dilution—Additional, more prominent dilution disclosure, including with respect to SPAC IPOs in a tabular format at quartile intervals based on percentages of the maximum redemption thresholds, and with respect to de-SPACs in a tabular format at intervals representing potential redemption thresholds and, in nontabular format a description of each material potential source of future dilution that non-redeeming stockholders may experience.
• Target Company—Additional disclosure in the de-SPAC registration statement regarding a non-reporting target company, such as Regulation S-K, Item 101 (Description of Business), Item 102 (Description of Property), Item 103 (Legal Proceedings), Item 304 (Changes in and Disagreements with Accountants on Accounting and Financial Disclosure), Item 403 (Security Ownership of Certain Beneficial Owners and Management) and Item 701 (Recent Sales of Unregistered Securities).
• Board Determinations—Disclosure about any determination by the SPAC’s board of directors that the de-SPAC transaction was advisable and in the best interests of the SPAC’s stockholders, and the material factors that the board considered in making that determination, including, without limitation, the target company’s valuation, financial projections, the terms of any financing, and any third-party report, opinion, or appraisal materially related to the de-SPAC, which must also be filed as an exhibit to the registration statement.
• Financial Projections—Disclosure with respect to de-SPAC financial projections regarding: (i) the purpose for which they were prepared; (ii) the party that prepared them; (iii) the material bases for and assumptions underlying them, and any material factors that may affect those assumptions, including a discussion of any material growth or reduction rates or discount rates used and the reasons for their selection; and (iv) if related to the target company, whether or not they continue to reflect the view of the target company’s management or the board about its future performance.
• Financial Statement Requirements—The new rules more closely align the financial statement requirements in a de-SPAC transaction with those of a traditional IPO, including with respect to the number of years of financial statements required, the audit requirements, and the age of financial statements.

In addition to the new rules, the SEC adopted rule amendments revising the definition of “blank check company” in Rule 405 under the Securities Act of 1933, as amended, and Rule 12b-2 under the Securities Exchange Act of 1934, as amended, to clarify that SPACs and de-SPAC transactions cannot rely on the safe harbor provisions under the Private Securities Litigation Reform Act of 1995, as amended.

Lastly, the SEC provided general guidance regarding statutory underwriter status in connection with de-SPAC transactions and a SPACs analysis of its investment company status under the Investment Company Act of 1940, as amended, as well as updated guidance regarding the use of projections in SEC filings.

The new rules take effect on July 1, 2024, except for the XBRL tagging requirements, which take effect June 30, 2025.

New Guidance on Extending Confidential Treatment Requests

Kicking off the new year, the SEC’s Division of Corporation Finance has updated its guidelines on confidential treatment requests (“CTRs”). The new guidance is focused on options available to companies with an existing confidential treatment order issued under the pre-2019 traditional approach (predating the streamlined approach adopted in 2019). 

Companies facing the expiration of a confidential treatment order have three main options: (i) they can re-file the exhibit without redactions if the information is no longer confidential; (ii) apply for an extension of the existing confidential treatment order; or (iii) shift to using the streamlined approach for confidential treatment. The SEC expects transitioning to the streamlined approach will be a popular choice for many companies given the expected cost savings from avoiding the need to justify the redactions to SEC staff in advance. Moving to the streamlined approach will require re-filing the redacted exhibit and satisfying the other requirements of Regulation S-K Item 601(b)(10)(iv). Importantly, an existing confidential treatment order doesn’t have to expire before the redacted exhibit is re-filed using the streamlined approach.

For companies that do not transition to the streamlined approach and instead opt to extend an existing confidential treatment order, there are now two extension applications that may be filed: a short-form extension or a long-form extension. The short-form extension application is only available for orders issued within the preceding three years. As the name suggests, the short-form application provides a more streamlined process for filing the application. Unlike the streamlined approach under Item 601(b)(10)(iv), however, the application must include an explanation to support the CTR. If the short-form extension application is not available, a long-form extension application must be used. In addition to requiring an argument to support extending the confidential treatment, the application must also include an unredacted copy of the document, a copy of the original confidential treatment order, the original CTR and any related SEC staff correspondence. The extension applications must be submitted with sufficient time before the existing order expires to allow for the SEC staff to review and make a determination. 

Eavesdropping Spouse Pleads Guilty to Insider Trading

On February 22, 2024, the SEC charged the husband of a former BP p.l.c. (“BP”) mergers and acquisitions manager for committing securities fraud related to insider trading by eavesdropping on his wife’s work calls. The work calls were made by the wife while she was working remotely, handling a potential acquisition of TravelCenters of America Inc. (“TravelCenters”), a full-service truck stop and travel center company.

After secretly listening to his wife’s private work calls, and without telling his wife, the husband, who is himself an employee of a public company, accumulated 46,450 shares of TravelCenters, according to the U.S. attorney’s office. To make the purchase of the shares, he sold all the positions in his brokerage account and Roth IRA, along with other equities, amounting to over $2 million. Shortly thereafter, when TravelCenters announced the BP acquisition, triggering its 71% stock jump, the husband sold all of his shares of the company, profiting $1.76 million, according to the U.S. attorney’s office.

The SEC filed a civil complaint against the husband related to the conduct, which he did not contest. He is also due to be sentenced May 17, facing a maximum possible sentence of five years in prison and a $250,000 fine. As part of his plea, he agreed to forfeit the $1.76 million of illegal profits.

SEC Charges Former CEO With Fraud for Making False Statements on Social Media 

The SEC has brought charges against Paul A. Pereira, former CEO of Alfi Inc., an advertising technology company, alleging that Pereira engaged in a scheme to artificially inflate Alfi’s stock price and mislead investors.

According to the SEC’s complaint, while serving as the CEO of Alfi, Pereira allegedly posted under a pseudonym that he “wouldn’t doubt” that Alfi “has $10 mm to $20 mm in revenues already in their back pocket,” when the company was set to report only $17,450 in revenue. 

Shortly thereafter, Pereira stated in a YouTube interview that the company was entering into a contract with the founder of a successful restaurant chain to deploy Alfi technology in the founder’s restaurants. It is alleged that the restaurant chain founder never discussed such a contract with Pereira or any other Alfi personnel.

The SEC’s complaint further alleges that Pereira made false and misleading statements on social media and in a company-issued press release about the company’s advertising inventory, including that “available advertising inventory by the end of 2021 is expected to be in excess of $100 million.” According to the complaint, the company had less than $5 million in advertising inventory at the time, and Pereira did not have a reasonable basis to believe that Alfi would achieve $100 million in advertising inventory by the end of 2021.

According to the charges, Pereira manipulated trading volume and orchestrated a series of promotional campaigns to create a false impression of demand for Alfi’s shares. By disseminating misleading information and concealing material facts, Pereira allegedly sought to enrich himself and other insiders at the expense of unsuspecting investors.

Recent Insights Into the SEC’s View on the Use of Artificial Intelligence in the Financial Markets

“AI washing” refers to the practice of companies exaggerating or misrepresenting the extent of their artificial intelligence (“AI”) capabilities or the impact of AI on their products or services (Drawing parallels with “greenwashing”—when companies overstate the environmental benefits of their products or practices).

In the context of AI, AI washing often involves companies using vague or inflated claims about AI integration to boost their brand image, attract investors, or gain a competitive edge in the market. This can include overstating the sophistication of their AI algorithms, the level of automation in their processes, or the overall AI readiness of their products or services.

In a speech before the Yale Law School on February 13, 2024, SEC Chairman Gensler discussed the increasing integration of AI in financial markets and the potential benefits and challenges associated with this trend. Noting that AI has the power to enhance efficiency, reduce costs, and improve decision-making in finance, Gensler emphasized that AI also raises significant regulatory and ethical considerations for financial firms.

Gensler highlighted three key areas of focus for the SEC regarding AI:

Transparency and Accountability: Gensler highlighted the need for companies to disclose information about their AI models, data sources, and methodologies to investors and regulators. He suggested that standardized disclosure frameworks could help improve transparency in this area.

Fairness and Bias: Gensler discussed concerns about fairness and bias in AI algorithms, particularly in areas such as credit scoring and investment decision-making. He noted that biased AI systems could perpetuate or exacerbate existing inequalities in financial markets. In his speech, Gensler called for greater attention to fairness and bias mitigation strategies in AI development and implementation.

Systemic Risks: Finally, Gensler highlighted the potential systemic risks associated with the widespread adoption of AI in financial markets, warning that complex AI systems could introduce new sources of interconnectedness and vulnerabilities, which may require enhanced regulatory oversight and risk management practices.

Just a month after Chairman Gensler’s speech on AI washing and the SEC’s related concerns, on March 18, 2024, the SEC announced settled charges against two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., for making false and misleading statements about their “use” of AI. The two companies agreed to pay a combined $400,000 in penalties to settle the SEC’s charges in what may be remembered as the first explicit AI washing charges from the SEC—and which are unlikely to be the last.

Chairman Gensler commented that the SEC found that “Delphia and Global Predictions marketed to their clients and prospective clients that they were using AI in certain ways when, in fact, they were not.” Mirroring the prescient discussion in his speech before the Yale Law School, Gensler left no doubt as to the SEC’s scrutiny and direction in response to AI washing: 

         We’ve seen time and again that when new technologies come along, 
         they can create buzz from investors as well as false claims by those 
         purporting to use those new technologies. Investment advisers should 
         not mislead the public by saying they are using an AI model when they 
         are not. Such AI washing hurts investors.

Overall, Chairman Gensler’s speech and the SEC’s more recent enforcement actions underscore the SEC’s commitment to investigating and addressing the implications of AI in financial markets, with a focus on transparency, fairness, and systemic risk management.

ExxonMobil Sues Activist Investors Over ESG Shareholder Proposals

Under Rule 14a-8 of the Securities Exchange Act of 1934, as amended, a company’s shareholders have always had the ability to submit proposals to a company for inclusion in the company’s proxy statement. Historically, SEC guidance on this rule allowed companies leeway in excluding certain shareholder proposals under two key exclusions, the “ordinary business” exclusion and the “economic relevance” exclusion. In 2021, however, the SEC rescinded its prior guidance and liberalized the ordinary business exclusion as it relates to a social policy proposal, stating that the “staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.” Subsequently, during the 2022 and 2023 proxy seasons, there was a record-breaking uptick in shareholder proposals filed as they related to broader social issues, such as diversity and inclusion, workplace-related social issues, and, particularly of note here, environmental and social governance related issues. 

ExxonMobil (“Exxon”), one of the world’s largest publicly traded oil and gas companies, has long been a target of criticism from environmentalists. Following the 2021 SEC guidance, shareholders and activist investors have increasingly pressured the company to take more significant action to address climate-related risks and to transition to cleaner energy sources. Specifically, Arjuna Capital and Follow This, two prominent activist groups known for shareholder advocacy on environmental and social issues, have led multiple shareholder proposals in recent years calling for Exxon to adopt more ambitious climate goals. Ahead of Exxon’s 2024 shareholder meeting, the groups put forth a shareholder proposal calling on Exxon to cut emissions faster from its own operations and from its supply chain, including but not limited to the indirect pollution that’s created when customers burn its oil and natural gas.

In January 2024, Exxon filed suit in federal court suing both Arjuna Capital and Follow This in an attempt to block their resolutions from being voted on at the annual meeting. Exxon argues that the proposals are misleading and violate SEC regulations regarding the submission of shareholder proposals. Exxon contends that the proposals fail to provide sufficient evidence of their potential impact on Exxon’s operations and thus should not be included in the company’s proxy materials for shareholder voting. Arjuna Capital and Follow This, on the other hand, argue that their proposals are well within the bounds of SEC guidelines and are necessary for addressing the significant environmental risks posed by Exxon’s business activities. They assert that shareholders have a right to voice their concerns and influence corporate decision-making, particularly on issues as critical as climate change mitigation and sustainability.

Despite Arjuna Capital and Follow This having since rescinded their shareholder proposals, Exxon refuses to drop the lawsuit—apparently endeavoring to have a court opine on these topics where the SEC has failed (or refused) to do so. The crux of Exxon’s argument lies in its assertion that the shareholder proposals would force the company to disclose confidential information about its strategic planning and potentially harm its competitive position in the market. Furthermore, Exxon contends that it is already taking steps to address climate change and that the shareholder proposals are unnecessary and overly burdensome.

This case raises questions about the balance between transparency, maintaining a competitive edge in the marketplace, and the growing influence of shareholder activism in shaping corporate behavior, particularly on environmental and social issues. As investors increasingly demand greater accountability from companies on sustainability matters, conflicts between management and shareholders could become more common. This particular legal battle is a microcosm of the larger struggle taking place within the corporate world over how best to address climate change and ESG. Regardless of the outcome, one thing is clear: the fight for a more sustainable future is far from over, and the role of companies like Exxon in that endeavor will continue to be closely scrutinized and even litigated.

Closing Thoughts

The SEC continued to be busy on both the rulemaking and enforcement fronts on these and other matters throughout the first quarter of this year. This update is not intended as a substitute for individualized legal advice.