SEC committee discusses climate and SPAC proposals

On May 6, the Securities and Exchange Commission’s Small Business Capital Formation Advisory Committee met to discuss the SEC’s recent rule proposals regarding climate-related disclosure and SPACs. (For more information on the proposals, refer to this PubCo blog post, this PubCo blog post and this PubCo blog post.)

At the meeting, the committee voted on a number of potential general recommendations. With respect to the SEC’s climate-related proposal, such recommendations included an affirmation of the committee’s belief in the importance of climate disclosure and a request to the SEC to perform a more detailed cost-benefit analysis of the proposal, especially with respect to smaller companies. It also included potential recommendations for the rules to:

  • Provide more scaling and phase-in periods for emerging growth companies and smaller reporting companies.
  • Expand safe harbors from liability.
  • Create an incentive structure, rather than a penalty structure.
  • Address considerations that could deter companies from conducting IPOs, as well as the overall potential impact on very small companies.
  • Consider the impact on private companies of public companies’ potential reluctance to include them in the value chain.
  • Consider industry-specific requirements and eliminate the costly and slow attestation requirement.
  • Treat the disclosure as “furnished,” not “filed.”
  • Delay the disclosure due date and delay the general phase-in dates to give companies more preparation time.

The committee also encouraged the SEC to keep the SPAC alternative viable, and included potential recommendations for the proposed rules to:

  • Require more disclosure earlier in the process to avoid information asymmetry.
  • Provide nuanced guidance to clarify who has underwriter status.
  • Provide a safe harbor for the disclosure of projections.
  • Lengthen time frames in the Investment Company Act safe harbor for identifying a target and completing a deSPAC transaction.

Refer to this PubCo blog post for more information on the meeting.

SEC staff comments on non-GAAP adjustments in collaboration agreements

According to MarketWatch, a number of biopharma companies have adjusted their accounting practices relating to certain payments in response to a 2021 exchange of letters between Biogen and SEC staff. In the letters, SEC staff objected to the company’s exclusion of material upfront and premium payments made in connection with collaboration and licensing agreements from non-GAAP R&D and non-GAAP net income. Biogen eventually agreed to discontinue these adjustments going forward and to recast prior period information, but biopharma companies should be aware of the SEC’s view on non-GAAP adjustments for upfront payments reflected in the exchange – and should consider whether any changes to their own practices are warranted. For more information, refer to this PubCo blog post.

California court strikes down state’s board gender diversity statute

On May 13, the Los Angeles County Superior Court determined that Senate Bill 826, a law requiring that all public companies listed on a major exchange and headquartered in California have a minimum number of women directors, violates the equal protection provisions of the California Constitution, and enjoined implementation and enforcement of the statute. After a lengthy bench trial beginning in December 2021, the verdict found that the state failed to show there was “a compelling state interest,” or that SB 826 is “necessary” or “narrowly tailored.” In determining that the state failed to meet this standard, the court found that there was “no Compelling Governmental Interest in remedying discrimination in the board selection process because neither the Legislature nor Defendant could identify any specific, purposeful, intentional and unlawful discrimination to be remedied.” This verdict follows the summary judgment in favor of the same plaintiffs in their case against Assembly Bill 979, California’s board diversity statute regarding “underrepresented communities.” The state has indicated that it intends to appeal the decision. Refer to this PubCo blog post for more information.

ESG incentives on the rise

On May 10, Pay Governance released a Viewpoint report on the rise of inclusion of environmental, social and governance metrics in corporate incentive plans, exploring the question of whether executives are excessively benefitting from these incentives. The report noted that 69% of S&P 500 companies reported the inclusion of ESG metrics in their incentive plans in their 2022 proxy statements, a significant increase from the 52% reported in 2021, if that percentage holds for the remainder of the year. The report also focused on criticism that these ESG targets will just lead to more pay and not more ESG, which Pay Governance found to not be empirically supported, and noted that its research indicates that compensation committee members are acting conservatively in setting and scoring ESG goals.

Audit Analytics publishes financial restatements report

In May, Audit Analytics published 2021 Financial Restatements – A Twenty-One-Year Review, an update of its report covering the prior 20 years of financial restatements. Most notably, the report found a striking 289% increase in the total number of restatements from 2020 to 2021 – 1,470 restatements, the highest number since 2006. This significant rise was attributable to SPACs, which contributed to 77% of the total restatements in 2021 due to SEC guidance on SPAC accounting issued in 2021. (For more information, refer to this PubCo blog post.) Excluding SPAC-related restatements, there was a 10% year-over-year decrease in total restatements. Other key takeaways from the 2021 report include:

  • 62% of restatements were reissuance restatements (big “R”), the highest proportion since 2005.
  • Debt and equity securities accounting was the top issue necessitating restatements in 2021, both including and excluding SPAC-related restatements.
  • The number of restatements with a negative impact on net income decreased from 37% in 2020 to 32% in 2021 (excluding SPAC-related restatements).
  • 61% of restatements in 2021 covered an annual report, with the balance covering quarterly financials (excluding SPAC-related restatements).
  • For SPAC-related restatements, 35% related to redeemable shares and 42% related to warrants.

Refer to this PubCo blog post for more information about the report.

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Cooley’s multipart 2022 US Corporate Governance Survey series provides public company board members and management teams with key insights on best practices and specific topics of interest. We’ve released the survey results for Part 1, which covered shareholder engagement and annual meetings, and there’s still time to participate in Part 2 of our survey, which focuses on insider trading and window period policies and practices. Your responses will remain completely anonymous, and this part of the survey will take no more than 10 minutes to complete.