January One-Minute Reads

Reminder: New securities laws affect Form 10- K

With Form 10-K season rapidly approaching, here is a brief list of the new securities laws impacting the 2023 Form 10-K for calendar year-end companies:

• Items 106(b) and (c) of Regulation S-K require disclosure in Item 1C of Form 10-K of specified matters related to cybersecurity risk management and strategy, board oversight of risks from cybersecurity threats, and management’s role in assessing and managing the company’s material risks from cybersecurity threats.
• Item 408(a) of Reg S-K requires disclosure in Item 9B of Form 10-K on a quarterly basis of:
• Whether, during the most recently completed fiscal quarter, any director or officer has adopted, materially modified, or terminated a Rule 10b5-1 plan and/or any non-Rule 10b5-1 trading arrangement.
• A description of the material terms of the Rule 10b5-1 plan or non-Rule 10b5-1 trading arrangement, other than pricing terms.
• Cover page check boxes require companies to indicate on the cover page of their annual report form:
• Whether the financial statements of the company included in the filing reflect correction of an error to previously issued financial statements.
• Whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the company’s executive officers during the relevant recovery period.
• Item 601(b)(97) of Reg S-K requires companies to file a copy of their clawback policy as Exhibit 97 to Form 10-K.
• Item 402(w) of Reg S-K requires disclosure in Item 11 of Form 10-K of specified information if during or after its last completed fiscal year a company either:
• Was required to prepare an accounting restatement that required a clawback under the company’s clawback policy.
• Had an outstanding balance of unrecovered excess incentive-based compensation under such policy relating to a prior restatement.

(As with the rest of Item 402, we expect most companies will incorporate this disclosure by reference from the proxy statement.)

Appeals court vacates share repurchase rules

On December 19, 2023, the US Court of Appeals for the Fifth Circuit issued an opinion vacating the Securities and Exchange Commission’s share repurchase rules that were adopted in May 2023. As summarized in the December 2023 edition of the One-Minute Reads, the court previously held that the SEC violated the Administrative Procedure Act by acting arbitrarily and capriciously for failing to substantiate the share repurchase rules’ benefits and costs and by applying inconsistent logic. The court did not vacate the rule, but instead remanded the rule back to the SEC to attempt to repair the defects by November 30, 2023. On November 22, following the ruling, the SEC announced that it had issued an order to postpone the effective date of the rules and, as a result, the share repurchase rule had been stayed pending further SEC action. On the same day, the SEC filed a motion for an extension of time to repair the defects. The US Chamber of Commerce opposed the motion.

On November 26, the court issued an order refusing to grant the extension, after which the SEC conceded that it is unable to correct the defects in the rules by the court-imposed deadline. Subsequently, the US Chamber of Commerce filed a motion to vacate the rules that was then granted by the court. Considering the vacatur and subject to further guidance, the preexisting requirements in Item 703 of Reg S-K will remain in effect. This requires issuers to provide certain information about their quarterly equity repurchases on an aggregated, monthly basis, in addition to other specified disclosures. Likewise, foreign private issuers, who would have been required to file a form F-SR under the new rules, should follow their preexisting disclosure requirements. For more information, refer to this December 19 Cooley PubCo blog post.

Division of Corporation Finance offers further guidance on cyber incidents

The December edition of the One-Minute Reads discussed three Form 8-K compliance and disclosure interpretations (C&DIs) issued by the SEC related to the requirement under new Item 1.05 of the Form 8-K to disclose specified information about a material cybersecurity incident within four business days of a company determining that the cybersecurity incident was material. More specifically, the C&DIs relate to the narrow allowance for a delayed filing under Item 1.05I in cases where the US attorney general has notified the SEC in writing that the disclosure poses a substantial risk to national security or public safety.

The SEC’s Division of Corporation Finance (Corp Fin) has added another new C&DI (Question 104B.04), which states that merely consulting with the Department of Justice regarding the availability of this delay would not necessarily result in the determination that the incident is material. This is because determining whether an incident is material and therefore subject to the requirements of Item 1.05 is based on all relevant facts and circumstances surrounding the incident. Accompanying the new C&DIs, Corp Fin Director Erik Gerding issued a statement on the new rules providing an overview of the cybersecurity disclosure rule and its rationale, delved into the cyber incident disclosure requirement and the related national security delay provision, and outlined next steps for companies to take. For more information, refer to this December 15 Cooley PubCo blog post.

SEC reviewing climate-related disclosures

On January 2, Bloomberg Tax reported that more than a dozen large companies have received comments from SEC staff on their climate-related disclosures in their SEC filings over the past three months. The focus areas of these comments were consistent with the sample letter issued by Corp Fin to companies in September 2021 that contained illustrative comments regarding their climate-related disclosures. Several of the comments related to the inclusion of disclosures in sustainability reports that aren’t included in SEC filings, which is a highlighted focus area of the staff, while others focus on the impacts of severe weather and how climate risk impacts customer demand and competition.

SEC adopts final rules for SPACs

On January 24, 2024, the SEC announced the adoption of final rules regarding the disclosure and other requirements relating to special purpose acquisition companies (SPACs), shell companies and projections. The final rules add new Subpart 1600 to Reg S-K, which requires specified robust disclosures about the SPAC sponsor, SPAC sponsor compensation, conflicts of interest, dilution and the target company. This new subpart also requires disclosures in deSPAC transactions regarding any determination by a board or similar body as to whether the deSPAC transaction is advisable and in the best interests of the SPAC and its shareholders, if required by law, and any outside report, opinion, or appraisal received that materially relates to the deSPAC transaction. In addition, under the final rules, the private operating company that is the target of the SPAC will be deemed a co-registrant when the SPAC files the registration statement on Form S-4 or F-4 for the deSPAC transaction, which would subject the private company and its signatories to liability under Section 11 of the Securities Act of 1933.

The final rules also:

1. Require enhanced disclosure regarding projections presented in filings in deSPAC transactions and make the safe harbor in the Private Securities Litigation Reform Act of 1995 for the use of projections unavailable in filings by SPACs.
2. Require that the registration statement filed in connection with the deSPAC transaction register not just the offering of shares to the target company’s shareholders but also register an offering to the existing SPAC shareholders.
3. Include a number of technical changes to disclosure and procedural requirements for SPAC IPOs and deSPAC transactions, as well as technical reporting requirements for post-deSPAC companies.

In addition, the release provides guidance to assist SPACs in assessing when they may meet the definition of an investment company under the Investment Company Act of 1940 and to assist participants in deSPAC transactions in determining their statutory underwriter status under the Securities Act. The release also includes updates to the SEC’s guidance regarding the use of projections in SEC filings more generally. The final rules will become effective 125 days after publication in the Federal Register. Compliance generally will be required upon effectiveness, while compliance with the structured data tagging requirements will only be required 490 days after publication in the Federal Register. For more information, refer to the SEC’s fact sheet and this January 25 Cooley PubCo blog post.

SEC denies no-action relief on AI proposals

The December One-Minute Reads discussed the emerging trend of shareholder proposals relating to artificial intelligence, with most proposals urging companies to publish an AI transparency report on whether they have adopted any ethical guidelines to protect workers, customers and the public from harms related to the use of AI. On January 3, the SEC denied a no-action request seeking to exclude this type of proposal from a company, noting that the proposal “transcends ordinary business matters and does not seek to micromanage” the company, and therefore is not excludable under Rule 14a-8(i)(7). This ruling may encourage additional shareholders to advance similar proposals in the future and sets the stage for gauging shareholder receptiveness to these proposals during this proxy season. For more information, refer to this article from Reuters.

Increase in political contributions shareholder proposals expected in 2024

In a recent newsletter, the Center for Political Accountability (CPA) disclosed its plans to submit 40 shareholder proposals this proxy season, a significant increase for the CPA over recent years. Per the newsletter, these will include corporate disclosure and accountability proposals and third-party spending proposals, which will request “that companies require reports from any third-party groups to whom they make payments, detailing the groups’ political expenditures, and that companies post this information on their websites.” The newsletter also provides an overview of CPA’s analysis of institutional investor support for its political disclosure proposals in the 2023 proxy season, finding that support dropped slightly to 71% from 75% in 2022.

Labor Department adopts independent contractor rule

On January 10, 2024, the US Department of Labor announced the publication of a final rule to update the test for determining whether a worker is an employee under the Fair Labor Standards Act (FLSA) or an independent contractor. For context, FLSA requirements relating to minimum wage, overtime and recordkeeping apply to employees, but do not apply to independent contractors, making the classification of a worker very consequential. The final rule rescinds the former administration’s business-friendly independent contractor test adopted in January 2021, and purportedly restores an economic reality test applied during previous administrations that looks at the “totality of the circumstances,” allowing consideration of any relevant evidence to determine a worker’s classification. More specifically, to analyze if a worker is an employee or independent contractor, the final rule provides six factors to consider when analyzing the economic realities of the working relationship. The final rule is expected to be particularly impactful for companies relying on gig workers and will be effective March 11, 2024. For more information, refer to the DOL’s Small Entity Compliance Guide.

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