Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The SEC issued two pieces of guidance on special purpose acquisition companies, or SPACs.  One piece, styled as a statement by Paul Munter, Acting Chief Accountant, speaks to financial reporting and auditing considerations of companies merging with SPACs.  The other statement, issued by the Division of Corporation Finance, is labeled “Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies.”

As to financial reporting and auditing matters the SEC notes, among other things:

  • Companies acquired by SPACs need to be prepared to transition from being a private company to a public company very quickly. Do not underestimate the challenges.
  • The combined public company should have finance and accounting professionals with sufficient knowledge of the relevant reporting requirements, including the applicable accounting requirements, and the appropriate staffing to meet deadlines for required current and periodic reports. In particular, there are matters that require significant judgement in accounting for the merger with the SPAC.
  • It is important for target companies to understand internal control over financial reporting and disclosure controls and procedures and have a plan in place for the combined public company to comply with those requirements on a timely basis.
  • Clear and candid communications between the audit committee, auditor, and management are important for setting expectations and proactively engaging as reporting, control, or audit issues arise during and after the merger process.
  • It is also important for the auditor to consider whether the appropriate acceptance and continuance procedures have taken place when a formerly private audit client prepares to go public through a SPAC merger. While this process also occurs in a traditional IPO, the compressed timing and complexity in a de-SPAC transaction may require thoughtful consideration and analysis pertaining to the client continuance assessment and may require the audit firm to quickly make adjustments to its engagement team to ensure the team has the appropriate level of expertise and experience with SEC and PCAOB requirements.

The statement by the Division of Corporation Finance focuses on accounting, financial reporting and governance issues that should be carefully considered before a private operating company undertakes a business combination with a SPAC. Among other things:

  • Financial statements for the acquired business must be filed within four business days of the completion of the business combination pursuant to Item 9.01(c) of Form 8-K. The registrant is not entitled to the 71-day extension of that Item;
  • The combined company will not be eligible to incorporate Exchange Act reports, or proxy or information statements filed pursuant to Section 14 of the Exchange Act, by reference on Form S-1 until three years after the completion of the business combination;
  • The combined company will not be eligible to use Form S-8 for the registration of compensatory securities offerings until at least 60 calendar days after the combined company has filed current Form 10 information;
  • The combined company will be an “ineligible issuer” under Securities Act Rule 405 for three years following the completion of the business combination;
  • If the combined company is NYSE or Nasdaq listed, the company also must meet qualitative standards regarding corporate governance, such as requirements regarding a majority independent board of directors, an independent audit committee consisting of directors with specialized experience, independent director oversight of executive compensation and the director nomination process, and a code of conduct applicable to all directors, officers, and employees. There is a risk that a private operating company that has not prepared for an initial public offering and is quickly acquired by a SPAC may not have these elements in place in order to meet the listing standards at the time required.  Advance planning may be necessary to identify, elect, and on-board a newly-constituted independent board and audit committee, and for them to adequately oversee the preparation and audit of the company’s financial statements, books and records, and internal controls.

Deluxe Entertainment Services Inc. v. DLX Acquisition Corporation involved a stock purchase agreement where Plaintiff Deluxe Entertainment sold all of its stock (the “Transaction”) in its wholly owned subsidiary, Deluxe Media Inc. (“Target”), to defendant DLX Acquisition Corporation (“Buyer,” and together with Target, “Defendants”), an affiliate of the private equity firm Platinum Equity. All of Target’s assets, except for those excluded by the parties’ purchase agreement (the “Purchase Agreement”), were transferred in the Transaction.

At closing, several million dollars in cash remained in Target’s bank accounts (the “Disputed Cash”). Seller alleges it failed to sweep those funds from Target before closing “for various practical and technical reasons,” and Buyer did not dispute Seller had the right to sweep those funds before closing.

Buyer refused to return the Disputed Cash upon request from the Seller, indicating the Purchase Agreement did not require it to do so.  Seller then commenced an action in the Court of Chancery alleging three causes of action for return of the Disputed Cash:

  • Buyer’s failure to return the Disputed Cash amounted to a breach of the Purchase Agreement.
  • Failure to return the cash was a breach of the implied covenant of good faith and fair dealing.
  • A request to reform the Purchase Agreement to address the issue.

Seller argued the parties never intended to transfer the Disputed Cash to Buyer as evidenced by:

  • The Purchase Agreement’s definition of net working capital for purposes of calculating the purchase price, and
  • Extrinsic evidence about the parties’ negotiations leading up to the Purchase Agreement, which Seller contends reflects the parties’ otherwise undocumented agreement that the Transaction would be “cash-free, debt-free.”

Breach of Purchase Agreement

The Court noted it is a general principle of corporate law that all assets and liabilities are transferred in the sale of a company effected by a sale of stock.  When Seller agreed to sell Buyer all the Target Shares, it agreed to sell all the Target’s assets.

As a result, the parties did not enumerate the assets transferred but instead listed certain excluded assets on a schedule.  The schedule did not address the Disputed Cash.

Seller argued the Purchase Agreement did not transfer Target’s cash to Buyer based on the Purchase Agreement’s calculation of the purchase price, which directs a calculation of net working capital that excluded cash.  Seller further argued that the Purchase Agreement’s exclusion of cash from Net Working Capital, and thus from the Closing Date Purchase Price, indicated the parties’ clear intent that the Transaction would be “cash-free, debt-free.”  The Court rejected these arguments, noting that the purchase price adjustments are just that: adjustments to how much Buyer was to pay, not to what assets the Buyer purchased. Nothing in the purchase price provisions indicated the parties’ intention to exclude cash according to the Court.

Seller contended that “at worst,” the Purchase Agreement is ambiguous in its treatment of cash, so the Court may reach its proffered extrinsic evidence and conclude the parties intended the Transaction to exclude cash. But the Court noted the Purchase Agreement was not ambiguous on this point, so it did not reach Seller’s arguments about the parties’ negotiation history. According to the Court a party cannot use negotiation history itself to create ambiguity, as extrinsic, parol evidence cannot be used to manufacture an ambiguity in a contract that facially has only one reasonable meaning.

Good Faith and Fair Dealing

Seller argued that the implied covenant of good faith and fair dealing required Buyer to return the Disputed Cash. Since Seller failed to identify a gap in transaction terms in which the implied covenant could operate, the Seller’s claim failed.

Other provisions of the Purchase Agreement contemplated the possibility that an asset could be inadvertently transferred at closing, but those provisions did not address the Disputed Cash. Here an unintended asset transfer was not an “unanticipated development,” but rather was “expressly covered by the contract.”  The Court stated to use the implied covenant to add the Disputed Cash to the list of excluded assets would be “to create a free-floating duty unattached to the underlying legal documents.”

Reformation

Seller contended that if the Purchase Agreement’s plain language does not evidence the parties’ agreement that the Disputed Cash was to be excluded from the Transaction, then the absence of such language was the result of a scrivener’s error. Seller therefore urged the Court to reform the Purchase Agreement.

The Court declined to reform the Purchase Agreement.  The Court noted Seller’s allegations about the parties’ negotiation history failed to plead the terms of a definite agreement that was materially different from the Purchase Agreement the terms of which the parties intended to incorporate into the Purchase Agreement. The alleged mistake that led to the perhaps unintended transfer of the Disputed Cash is not the sort of mistake that supports reformation; it is not a mistake in the expression of the Purchase Agreement, but rather an operational mistake by Seller in preparing to perform.

More fundamentally, Seller offered no evidence of a scrivener’s error in the Purchase Agreement. Seller did not identify what error was made when reducing the Purchase Agreement to writing nor any mistake as to the contents or effect of a writing that expresses the agreement. Nor did Seller identify an erroneous belief relating to the facts as they existed at the time of the making of the contract.

The Court stated the “mistake” at issue was Seller’s failure to sweep the Disputed Cash from Target’s bank account, separate and apart from the terms of the Purchase Agreement. Seller’s failure to sweep Target’s cash was an operations or accounting mistake, which is crucially distinguishable from a scrivener’s error in the underlying agreement itself that can be remedied by reformation.  The Court held it will not change the terms of the parties’ bargain to accommodate Seller’s error in preparing to perform under the agreement that reflects that bargain.

In September 2020 the SEC adopted final rules altering the shareholder proposal framework for the first time in 20 years. Following another split-vote of the Commissioners, the SEC approved modifications to the current shareholder ownership threshold for initial submissions as well as the shareholder support levels required for resubmissions of proposals and adopted several other notable changes.

Now, following the change in administrations, a resolution has been introduced to invalidate the revised rules under the Congressional Review Act.  The CRA empowers Congress to review, by means of an expedited legislative process, new federal regulations issued by government agencies and, by passage of a joint resolution, to overrule a regulation. Once a rule is thus repealed, the CRA also prohibits the reissuing of the rule in substantially the same form or the issuing of a new rule that is substantially the same “unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.”

The resolution that has been introduced is very simple:

Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, That Congress disapproves the rule submitted by the Securities and Exchange Commission relating to “Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a–8’’ (85 Fed. Reg. 70240 (November 4, 2020)), and such rule shall have no force or effect.

Additional background information can be found in Liz Dunshee’s blog at TheCorporateCounsel.net.

The SEC has adopted interim final amendments to Form 10-K, Form 20-F, Form 40-F, and Form N-CSR to implement the disclosure and submission requirements of the Holding Foreign Companies Accountable Act, or the HFCA Act.  The HFCA Act became law on December 18, 2020. Among other things the HFCA Act requires the SEC to identify each “covered issuer” that has retained a registered public accounting firm to issue an audit report where that registered public accounting firm has a branch or office that:

  • Is located in a foreign jurisdiction; and
  • The PCAOB has determined that it is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction.

The SEC refers to registrants so identified as Commission-Identified Issuers.   Commission-Identified Issuers are required to submit documentation to the Commission that establishes that they are not owned or controlled by a governmental entity in that foreign jurisdiction. In addition, if the registrant is determined to be a Commission-Identified Issuer for three consecutive years, Section 2 of the HFCA Act directs the Commission to prohibit trading of the registrant’s securities. Section 3 of the HFCA Act provides that Commission-Identified Issuers that are foreign issuers, referred to as Commission-Identified Foreign Issuers, are subject to additional specified disclosure requirements, as discussed in more detail below.

Scope of Amendments

The scope of the interim final amendments is limited to:

  • the statutory mandate to issue rules that establish the manner and form in which a Commission-Identified Issuer must make the required submissions; and
  • the disclosure obligations set forth in Section 3 of the HFCA Act that have been added to the relevant Commission forms.

Role of the PCAOB

Under Section 104(i)(2) of the Sarbanes-Oxley Act, as added by the HFCA Act, the PCAOB is responsible for determining that it is unable to inspect or investigate completely a registered public accounting firm because of a position taken by an authority in a foreign jurisdiction. The SEC  understands that the PCAOB is considering its obligations under the HFCA Act, including the process for making these determinations. The SEC believes it is important that the PCAOB act quickly to identify the best manner in which to make these determinations. Any PCAOB rulemaking in response to the HFCA Act will be subject to Commission review and approval prior to taking effect. Once the PCAOB process has been established, the Commission will use the PCAOB’s determination about which firms it is unable to inspect or investigate completely, along with information in a registrant’s annual reports, to compile a list of registrants that are Commission-Identified Issuers.

Disclosure Requirements

Section 3 of the HFCA Act requires a Commission-Identified Foreign Issuer to provide certain additional disclosure in its annual report for the year that the Commission so identifies the issuer. The HFCA Act requires this disclosure in the issuer’s Form 10-K, Form 20-F, or a form that is the equivalent of, or substantially similar to, these forms. Specifically, a Commission-Identified Issuer is required to disclose:

  • That, during the period covered by the form, the registered public accounting firm has prepared an audit report for the issuer;
  • The percentage of the shares of the issuer owned by governmental entities in the foreign jurisdiction in which the issuer is incorporated or otherwise organized;
  • Whether governmental entities in the applicable foreign jurisdiction with respect to that registered public accounting firm have a controlling financial interest with respect to the issuer;
  • The name of each official of the Chinese Communist Party (“CCP”) who is a member of the board of directors of the issuer or the operating entity with respect to the issuer; and
  • Whether the articles of incorporation of the issuer (or equivalent organizing document) contains any charter of the CCP, including the text of any such charter.

While Section 3 of the HFCA Act does not mandate specific rule or form changes, the SEC believes that amending its forms to include the new disclosure requirements will help registrants comply with the HFCA Act. The Commission therefore amended Form 10-K, Form 20-F, Form 40-F, and Form N-CSR to reflect the disclosure requirements in Section 3 of the HFCA Act.

Submission Requirements

In addition to the Section 3 disclosure requirement, Section 2 of the HFCA Act amended Sarbanes-Oxley Act Section 104 to, in part, require any Commission-Identified Issuer to submit to the Commission documentation establishing that the issuer is not owned or controlled by a governmental entity in the foreign jurisdiction of the registered public accounting firm that the PCAOB is unable to inspect or investigate completely, and mandates that the Commission adopt rules establishing the manner and form in which such submissions will be made no later than 90 days after enactment. Because the submission requirement is triggered by the preparation of an audit report on a registrant’s financial statements, the Commission is amending Form 10-K, Form 20-F, Form 40-F, and Form N-CSR to implement this provision. In contrast to the disclosure requirement in Section 3 of the HFCA Act that applies only to Commission-Identified Foreign Issuers, the submission requirement in Section 2 of the HFCA Act applies to all Commission-Identified Issuers. The amendments require a registrant that is a Commission-Identified Issuer that is not owned or controlled by a governmental entity in the described foreign jurisdiction to electronically submit documentation to the Commission on a supplemental basis that establishes that the registrant is not so owned or controlled. Under the interim final amendments, such submissions will be made through the Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system on or before the due date of the relevant annual report form.

While the interim final amendments prescribe the timing and means by which such submissions shall be made, neither they nor the HFCA Act specify the particular types of documentation that can or should be submitted for this purpose. Moreover, the SEC recognizes that available documentation could vary depending upon the organizational structure and other factors specific to the registrant. Thus, as an initial matter, registrants will have flexibility under the interim final amendments to determine how best to satisfy this requirement. At the same time, the SEC is requesting comment as to whether the Commission should require specific types of documentation or whether additional guidance would be necessary or useful to registrants as they seek to comply with the submission requirement.

In re Forum Mobile, Inc. considers petitioner Synergy Management Group LLC’s request for the appointment of its President to be custodian of Forum Mobile, Inc. under Section 226(a)(3) of the Delaware General Corporation Law, or DGCL. The respondent in the action technically is Forum, but according to the Court, Forum is a defunct entity whose only value lies in the fact that its shares continue to have a CUSIP number that allows them to trade over the counter.  Synergy seeks to revive Forum to use as a blank check company. Through a reverse merger with Forum, a new business could access the public markets.

The court notes that in addition to not complying with the federal securities laws, Forum has failed to comply with Delaware law. It does not maintain a registered agent within the State of Delaware, has not filed annual reports with the Delaware Secretary of State, and has not held an annual meeting of stockholders. The Delaware Secretary of State’s website lists Forum’s status as void for failing to pay its franchise taxes. Forum appears to have abandoned its business

Affidavits filed with the Court indicate Synergy has attempted to locate Forum’s officers and directors to demand that they cause Forum to comply with its legal obligations.  Synergy has received no response.

Despite Forum’s status as a defunct entity, the fact that its shares have a CUSIP number and trade over the counter gives the company value. Recognizing this fact, Synergy acquired 494,530 shares of its stock

Through the instant litigation in the Court of Chancery, Synergy seeks to have its president appointed as a custodian. The order appointing the custodian would provide the custodian the power to call a meeting of stockholders, and authorize the meeting to proceed under a special quorum requirement so that the stockholders who attend the meeting can elect a new board of directors. Synergy’s CEO then will revive Forum for use as a blank check entity. In particular the court indicated he intends to “identify private companies that may be interested in a reverse merger” with Forum.

Synergy’s petition is one of six virtually identical petitions that Synergy has filed. Synergy’s counsel also represents Universal Management Association, which has filed four virtually identical petitions seeking to have its president appointed as a custodian for other defunct Delaware corporations.

The Court noted Synergy’s petition implicates important questions of public policy, including the State of Delaware’s interest in preventing the use of Delaware entities to circumvent the federal securities laws.

The Court noted Synergy’s request is the latest instance of a recurring phenomenon. The Court of Chancery periodically confronts efforts by capital-markets entrepreneurs to revive otherwise defunct entities to use as blank check companies.

In reviewing precedents, the Court noted the odd fact that directors of company like Forum should have In the usual course of business filed a certificate of dissolution terminating its corporate existence and a deregistration statement terminating its status as a reporting company. Had the directors taken these responsible actions it would be impossible to revive a defunct entity as a blank check company.

The Court rejected Synergy’s arguments that the SEC does not prohibit reverse mergers as controlling precedent for this matter.

The Court noted Delaware authorities addressing efforts to revive defunct entities for use as blank check companies reflect a consistent Delaware public policy against allowing capital-markets entrepreneurs to deploy Delaware law to bypass the federal securities laws that govern stock offerings. That policy is based on the Court of Chancery’s understanding of the federal securities laws and the SEC’s priorities.

The Court stated it would be helpful to have input from the SEC and the benefit of adversarial briefing on the petition. That was particularly true because Synergy and another firm have filed a raft of these petitions. Having input from the SEC also would provide a direct answer to the question of whether Delaware’s concern about creating a state-law bypass around the federal securities laws governing stock offerings has become stale, as Synergy argues.

The Court further stated it would benefit from the appointment of an amicus curiae who can consult with the SEC regarding the petition. Informed by a consultation with the SEC, the amicus curiae will provide an independent view regarding whether the petition should be granted.

Accordingly, the Court appointed a Delaware attorney as amicus curiae.

The Securities and Exchange Commission announced settled charges against an Oklahoma-based gas exploration and production company, Gulfport Energy Corporation, and its former CEO, Michael G. Moore, for failing to properly disclose as compensation certain perks provided to Moore, as well as failing to disclose certain related person transactions.

SEC enforcement actions for failure to disclose perks always attract a lot of attention.  Almost never do these cases rest on fine lines of interpretation with people trying to do the right thing.  Most of the cases result from egregious actions and blatant disregard of the rules.  According to the SEC’s description, this appears to be one of those cases.  According to the SEC:

From the time he became CEO in 2014 until his resignation in October 2018 (the “Relevant Period”), Moore: (1) caused Gulfport to incur approximately $650,000 worth of charges by traveling on chartered aircraft for reasons that were not integrally and directly related to the performance of his CEO duties; and (2) used a Gulfport corporate credit card for personal expenses that he did not repay timely, which resulted in Gulfport extending Moore interest-free credit and carrying a related person account receivable. Additionally, during 2015, Gulfport paid Moore’s son’s company approximately $152,000 to provide landscaping services.

The SEC order finds that during the Relevant Period, Gulfport did not have any internal policies or procedures specifically governing the use of chartered aircraft. Gulfport’s Code of Business Conduct and Ethics, however, required that “[a]ll Company assets should be used for legitimate business purposes only.” Also, by 2016, Gulfport issued an Employee Handbook, approved and adopted by Moore, that provided that company resources should not be used for personal expenses.

From 2014 to 2018, Moore caused Gulfport to pay for his travel by chartered aircraft in some instances where his travel was not integrally and directly related to the performance of his duties as CEO, costing Gulfport approximately $650,000. For example, Moore used chartered aircraft for himself and his wife to attend two events sponsored by a Gulfport supplier: a wine tasting weekend in Napa, California and a poker tournament in Las Vegas, Nevada. Neither one of these events was integrally and directly related to Moore’s duties as Gulfport’s CEO.

As a result of the lack of policies and procedures discussed above, Gulfport did not review Moore’s chartered aircraft usage to determine if it involved perquisites or personal expenses. While Gulfport was aware of the chartered aircraft usage through its process of purchasing and tracking the charter services, no one at Gulfport reviewed the individual flights to determine the flight purpose.

Moore also did not provide information about his flights to Gulfport during the annual process to identify perquisites and other personal benefits that might require disclosure. Each year, in connection with the preparation of the proxy statement, Moore received a document titled “Questionnaire for Directors, Officers and Certain Other Persons” (the “D&O Questionnaire”). The D&O Questionnaire required that perquisites and personal benefits be disclosed, and contained detailed examples and explanations concerning benefits that may require disclosure, including “[p]ersonal use of Company provided aircraft.” Further, the D&O Questionnaire highlighted that “[i]f you have any doubts about whether to include an item of information, please resolve those doubts in favor of disclosure.”

In addition, Gulfport hired Moore’s son’s company to perform landscaping work for Gulfport in at least 2014, 2015, and 2016. From January 1, 2015, through December 1, 2015, Gulfport paid Moore’s son’s company approximately $152,000 for this work.

In December 2015, Moore directed his son’s company to repay Gulfport approximately $32,000, thereby bringing the amount paid to the landscaping company below $120,000, the threshold for related person transaction disclosure. Moore then personally paid his son’s company the additional $32,000 to make up for the shortfall created by the repayment.

Moore’s son’s company had in fact provided services and materials valued at approximately $152,000 in 2015. In Moore’s D&O Questionnaire for the year ending 2015, he failed to identify the payments to his son’s company, even though the information was required to be disclosed.

Gulfport and Moore did not admit or deny the SEC’s findings.

The Securities and Exchange Commission announced the creation of a Climate and ESG Task Force in the Division of Enforcement.

Consistent with increasing investor focus and reliance on climate and ESG-related disclosure and investment, the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct.  The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.

The initial focus will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.  The task force will also analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.

In addition, the Climate and ESG Task Force will evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues, and provide expertise and insight to teams working on ESG-related matters across the Division.

On March 5, 2021, the Securities and Exchange Commission charged AT&T, Inc. with repeatedly violating Regulation FD, and three of its Investor Relations executives with aiding and abetting AT&T’s violations, by selectively disclosing material nonpublic information to research analysts.

The enforcement action demonstrates how efforts to talk down analyst estimates can potentially violate Regulation FD.

According to the SEC’s complaint, in March and April of 2016, Defendant AT&T, aided and abetted by Defendants Womack, Evans, and Black, executives in its Investor Relations Department, repeatedly violated Regulation FD.  Regulation FD is a Commission rule that prohibits selective disclosures by issuers of material nonpublic information to securities analysts and others.  The core Regulation FD violation alleged by the SEC is that AT&T and other defendants disclosed AT&T’s projected and actual financial results during phone calls Womack, Evans, and Black held with equity stock analysts from approximately 20 Wall Street firms on a one-on-one basis.

According to the SEC, in early March 2016, AT&T and its executives, including Womack, Evans, and Black, learned that a steeper-than-expected decline in smartphone sales by AT&T would cause its revenue for the first quarter of 2016 (“1Q16”) to fall short of analysts’ estimates. In fact, AT&T’s “equipment upgrade rate” (i.e., the rate at which existing customers purchased new smartphones) would be a record low for the company, with the result that AT&T’s consolidated gross revenue was expected to fall more than $1 billion below the consensus estimate—that is, the average of the forecasts for all analysts covering AT&T.

Fearful of a revenue miss at the end of the quarter, AT&T’s Chief Financial Officer instructed AT&T’s IR Department to “work[] the analysts who still have equipment revenue too high.”

In turn, the Director of Investor Relations (“IR Director”) instructed Womack, Evans, and Black to speak to analysts privately on a one-by-one basis about their estimates in order to “walk the analysts down”—i.e., induce analysts to reduce their individual estimates. The goal, according to the SEC, was to induce enough analysts to lower their estimates so that the consensus revenue estimate would fall to the level that AT&T expected to report to the public—i.e., AT&T would not have a revenue miss, which would have been the company’s third consecutive quarterly miss.

Between March 9 and April 26, 2016, Womack, Evans, and Black called approximately 20 separate analyst firms and spoke to analysts in order to induce them to lower their revenue estimate and thereby reduce the consensus estimate to the level that AT&T expected to report. During these calls, Womack, Evans, and Black intentionally disclosed material nonpublic information regarding AT&T’s results to date. Depending on the firm and the date of the call, Womack, Evans, and Black disclosed AT&T’s projected or actual equipment upgrade rate, its projected or actual wireless equipment revenue amount (presented as a percentage decrease compared with the first quarter of 2015), or both.

On some of Black’s calls to analysts, he represented to the analysts that he was conveying publicly available consensus estimates, when in fact he was providing AT&T’s own internal projected or actual results. Black knew or recklessly disregarded that he was misrepresenting the information he was conveying to analysts because he tracked AT&T’s calculation of consensus estimates—none of which matched the information he provided on the calls with analysts.

The SEC alleges Womack, Evans, and Black knew or recklessly disregarded that the information that they provided to the analysts during these calls was both material and nonpublic. Among other things, they knew that they were prohibited from selectively disclosing AT&T’s internal revenue and related data to analysts, and they did so with the expectation that the analysts would act on the information to substantially reduce the estimates they published for investors. Their knowing or reckless conduct was also evidenced by, for example, Black’s efforts to disguise the internal information he was presenting as “consensus,” the fact that the analysts’ initial estimates deviated so far from AT&T’s projected and actual results that the group needed to call approximately 20 separate firms to bring the consensus down to where AT&T could meet it, and that they presented the equipment upgrade rate as a “record low” during some of these calls.

Finally, the SEC alleges the analyst firms that received these calls promptly adjusted their revenue estimates, resulting in a reduced consensus revenue forecast for 1Q16 that AT&T beat when it announced earnings on April 26, 2016, in a Form 8-K filed with the SEC.

No Court has found any of the defendants has violated the law, and the allegations in the SEC’s complaint are as of yet unproven.

In a public statement Acting SEC Chair Allison Herren Lee noted that she had directed the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings. Chair Lee noted the Commission in 2010 provided guidance to public companies regarding existing disclosure requirements as they apply to climate change matters. As part of its enhanced focus in this area, the staff will review the extent to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks. The SEC staff will use insights from this work to begin updating the 2010 guidance to take into account developments in the last decade.

ISS has posted its usual suite of interpretive material for the upcoming proxy season.

The Compensation FAQs note exceptional circumstances of the COVID-19 pandemic and its impact on company operations will be considered in ISS’ qualitative evaluation. The FAQs then point you toward ISS’ previously released COVID-19 FAQs.

The Equity Compensation Plan FAQs note that passing scores of the Equity Plan Scorecard (EPSC) will increase for the S&P 500 model (from 55 points to 57 points) and the Russell 3000 model (from 53 points to 55 points). The threshold passing scores are unchanged for other models. There are no new factors or factor score adjustments.