CURRENT MONTH (July 2024)

Delaware Governor Signs Controversial “Market-Practice” Amendments to General Corporation Law

By: Eric Siegal, Mark Thierfelder, and Rick Horvath, Dechert LLP

On July 17, 2024, Delaware Governor John Carney signed into law SB 313, which amends the Delaware General Corporation Law (“DGCL”) to reinstate market practices that would have been impacted by a series of Court of Chancery decisions from late 2023 and early 2024. In particular, the amendments conform Delaware law to match current practice by, among other things:

  1. permitting boards of directors to approve merger agreements in only “substantially final form,” as opposed to only final or essentially final form;
  2. allowing parties to agree in a merger agreement that a party breaching the agreement pay any penalties or suffer any consequences set forth in the agreement (including payment for a lost premium) and to agree to the appointment of a representative to act on behalf of all stockholders; and
  3. legally authorizing corporations to enter into governance agreements with stockholders in return for “minimum consideration” as determined by the board.

SB 313 becomes effective on August 1, 2024, and will apply to agreements and transactions both going forward and in place prior to that date, provided the agreement is not subject to a civil action pending on or before that date.

For a more fulsome analysis, please see the authors’ July 22, 2024, publication.

Dismissal of Much of SEC’s SolarWinds Complaint Has Potentially Broad Implications for SEC Cybersecurity Enforcement

By: Mark Schonfeld, David Woodcock, Vivek Mohan, Michael Roberts, and Sarah Pongrace, Gibson Dunn

On July 18, 2024, the U.S. District Court for the Southern District of New York largely granted SolarWinds’ motion to dismiss and dismissed most of the SEC’s claims against the company and its former Chief Information Security Officer (CISO). The SEC’s action against SolarWinds related to a highly publicized compromise of the company in 2020 that was attributed to Russia’s Foreign Intelligence Service (SVR) who had inserted malware into a routine SolarWinds software update. Although thousands of SolarWinds customers received the software update, the SVR used the compromise to access the environments of certain SolarWinds customers in the government and private sector (the “SUNBURST” incident).

The court dismissed most of the claims advanced by the SEC relating to its disclosures, including SolarWinds’ Form 8-K filings, but did sustain claims against SolarWinds and its CISO alleging that a “Security Statement” posted on its website in 2017 may have been false or misleading.

The decision is noteworthy for several reasons, including:

  • It may impact how the SEC thinks about its broad use of accounting controls as a basis to charge a disclosure violation related to a cyber incident.
  • The decision makes clear that more than isolated failures are required to put the adequacy of a company’s disclosure controls and procedures in issue.
  • The decision leaves open the possibility that CISOs, not just management with specific disclosure responsibilities, may in certain cases continue to be an enforcement target.

For a more fulsome analysis, please see our full update from July 25, 2024.

SEC Spring 2024 Reg Flex Agenda

By: Rani Doyle, KPMG*

The SEC’s Spring 2024 Regulatory Flexibility Agenda, released July 8, outlines the agency’s rulemaking plans for the next twelve months—which reflect many of the same items from 2023. Many of the agenda items have a complicated background, which—together with the upcoming election—likely means that the agenda will continue to flex. Certain agenda items are highlighted below.

Final rule stage:

  • Rule 14a-8 Amendments: October 2024 (The July 2022 proposal seeks to update bases for exclusion of shareholder proposals and would amend the substantial exclusion, the duplication exclusion, and the resubmission exclusion.)
  • Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies: October 2024 (The March 2022 proposal would require subject companies to adopt and implement written cybersecurity policies and procedures reasonably designed to address cybersecurity risks, create a new form for reporting significant cybersecurity incidents, and require other recordkeeping and disclosures.)
  • Enhanced Disclosure by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices: October 2024 (The May 2022 proposal would amend rules and forms under both ’40 Acts to require subject companies to provide more information about their ESG investment practices. The amendments seek to provide “a consistent, comparable, and decision-useful regulatory framework for ESG advisory services and investment companies to inform and protect investors while facilitating further innovation in this evolving area of the asset management industry.”) 

Proposed rule stage:

  • Human Capital Management Disclosure: October 2024 (The Division of Corporation Finance is considering recommending that the SEC propose rules to require enhanced disclosures regarding human capital management (discussed in August 2020 final rules re: updates to Regulation S-K and in subsequent SEC rulemaking petitions).)
  • Incentive-Based Compensation Arrangements: October 2024 (The SEC, Federal Reserve, FDIC, OCC, and certain other federal agencies are reproposing rules regarding incentive-based compensation practices at certain financial institutions that have $1 billion or more in total assets. Dodd-Frank required the SEC and other agencies to prohibit incentive-based payment arrangements at certain financial institutions that encourage inappropriate risks, such as providing excessive compensation or leading to a material financial loss.)
  • Corporate Board Diversity: April 2025 (The Division of Corporation Finance is considering recommending that the SEC propose rules to require enhanced disclosure about the diversity of board members and nominees.)
  • Revisions to Definition of Securities Held of Record: April 2025 (The Division of Corporation Finance is considering recommending that the SEC amend the “held of record” definition for purposes of Exchange Act Section 12(g).)
  • Regulation D and Form D Improvements: April 2025 (The Division of Corporation Finance is considering recommending that the SEC propose amendments to Reg D, including updates to the definition of “accredited investor” and to Form D.)
  • Rule 144 Holding Period: April 2025 (The Division of Corporation Finance is considering recommending that the SEC repropose (from December 2020) certain amendments to Rule 144.)

The proposals re: Regulation D and Exchange Act Section 12(g) would address certain concerns about the massive growth of the private markets and shift of capital from public to private markets.

The SEC’s New Look

By: Michael Hyatte, Mayer Brown

[Editor’s note: The SEC changed its website this month. For many regular visitors to SEC.gov (including one of the editors of this MIB), the changes seem dramatic. Fortunately, a note from Mayer Brown explains the key changes.]

The changes, announced in a July 2 press release, are intended to align with the policies promoted by the 21st Century Integrated Digital Experience Act (also known as the “21st Century IDEA”), the 2018 enactment calling for new and redesigned websites created by executive agencies for use by the public to follow prescribed design principles. The SEC’s announcement states that the actions improve the site’s responsiveness, mobile usability, and search capabilities. Two external features are highlighted. “Quick Links” are intended to afford better access to “the most sought-after content quickly.” A “Tips and Complaints” wizard is for reports of misconduct and for complaints from investors.

The redesign changes the look of the website quite a lot. The Commission’s previous homepage, which had been dominated by a photograph showing staffers at work or models portraying investors and their advisers, has been replaced by a more utilitarian design emphasizing links to other information on the site. The quick links are the most prominent part of the display, linking to EDGAR and to information on rulemaking, investor education, enforcement news, SEC votes (a puzzling inclusion), as well as to statutes and regulations. Homepages of the Commission’s operating divisions—Corporation Finance, Enforcement, Investment Management, and Trading and Markets—have been redesigned along similar lines.

For a full note on the changes and a personal POV, see the full article in this link.

Trade Groups Urge SEC to Reconsider Three Proposals

By: Karen Liu, Reid & Wise LLC

On July 9, 2024, the six trade groups representing private fund and syndicated loan managers that recently won the lawsuit against the now-vacated private fund adviser rules wrote to the U.S. Securities and Exchange Commission (the “SEC”) in a four-page letter (the “Letter”), urging the SEC to withdraw three proposed rules (collectively, the “Proposals”), and if not withdrawn as requested, at least not to apply such Proposals to private fund advisers and investment advisers with respect to their services not towards “retail customers.”

The three proposed rules mentioned in the Letter are:

  • Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies, 87 Fed. Reg. 13524 (published on March 9, 2022) (the “Cybersecurity Proposal”);
  • Outsourcing by Investment Advisers, 87 Fed. Reg. 68,816 (published on November 16, 2022) (the “Outsourcing Proposal”); and
  • Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers, 88 Fed. Reg. 53,960 (published on August 9, 2023) (the “Predictive Data Analytics Proposal”).

The six trade groups are the National Association of Private Fund Managers, Alternative Investment Management Association, American Investment Council, Loan Syndications and Trading Association, Managed Funds Association, and National Venture Capital Association.

The trade groups argued in the Letter that the three Proposals were based on Section 211(h) and/or Section 206(4) of the Investment Advisers Act of 1940, as amended, the same legal basis of the vacated private fund adviser rules. According to the trade groups, the Cybersecurity Proposal and the Outsourcing Proposal were based on Section 211(h) and Section 206(4), while the Predictive Data Analytics Proposal was based on Section 211(h).

The recent overturn of the 1984 Chevron decision by the U.S. Supreme Court on June 28, 2024, in Loper Bright Enterprises v. Raimondo could remind regulators of rethinking ex ante congressional design and ex post judicial review when making an agency regulation. The trade groups’ July 9 Letter immediately follows the Supreme Court’s June 28 decision and the Fifth Circuit’s vacation of the private fund adviser rules on June 5, 2024. It is still uncertain how the SEC will respond to the Letter and proceed with the three Proposals. On July 17, 2024, SEC Commissioner Hester Peirce called on the SEC to reprioritize its rulemaking agenda to closely align with the agency’s statutory mandate.

EDITED BY

Rani Doyle

Rani Doyle

Managing Editor, Securities Law

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