Public Company Watch: September 2023

In the September edition of our Public Company Watch, we cover key issues impacting public companies, including the SEC’s new C&DIs and sample comment letter; considerations for issuers as they start their Form 10-Q preparations; the SEC’s recently settled charges in a case involving NFTs; the Delaware Supreme Court’s clarification of the standard of review that applies in contested elections; and the decision in the case Stephen Thaler v. Shira Perlmutter and The UnitedStates Copyright Office to affirm the position that a work generated entirely by AI technology is not eligible for copyright protection.

Division of Corporation Finance Posts Sample Comment Letter Regarding XBRL Disclosures On September 7, 2023, the SEC’s Division of Corporation Finance issued a sample comment letter regarding issuers’ XBRL disclosures, which includes comments focused on Item 405 of Regulation S-T, the cover page, pay v. performance disclosure and financial statements. The comment letter is not a complete list of the XBRL-related comments an issuer might anticipate, but highlights the importance of compliance with the technical aspects of the SEC rules. Many recent final rules—like the insider trading amendments, the share repurchase rules and the cybersecurity rules to name a few—include XBRL components so issuers should be building a buffer into their filing calendars to allow for ample time to tag their disclosures. A summary of the sample comments and relevant takeaways is set forth below. In This Edition SEC Spotlight 1 SEC Staff Issues New C&DIs related to Insider Trading Rules Division of Corporation Finance Posts Sample Comment Letter Regarding XBRL Disclosures Form 10-Q Prep SEC Staff Issues New C&DIs Related to Share Repurchase Rules SEC Brings and Settles Its First Non-Fungible Token Enforcement Action Activism Update 5 Delaware Supreme Court Clarifies Standard Of Review For Board Interference In Contested Director Elections Other Regulatory Updates 5 U.S. Department of Labor Proposes Increases to Salary Levels for Overtime Exemptions Litigation Corner 5 Tackling the Scope of Copyright Protection for AI-Generated Works: Stephen Thaler v. Shira Perlmutter and The United States Copyright Office Broadly Syndicated Term Loan Not a “Security”: Kirschner v. JP Morgan Chase Bank, N.A. Arkansas Teachers Retirement System v. Goldman Sachs Group Inc.: Raising the Bar for Class Certification in Securities Fraud Cases SEC Rulemaking Tracker 7 September 2023 2 Public Company Watch Key Issues Impacting Public Companies ƒ Cover Page: If an issuer does not consistently present the number of shares of common stock outstanding between its cover page and its balance sheet (i.e., presenting a whole amount in one place and the same amount in thousands in the second), the issuer could receive a comment asking for the information to be presented consistently in future filings. ƒ Pay v. Performance: Issuers should ensure that their new Item 402(v) of Regulation S-K disclosures are properly tagged utilizing Inline XBRL tagging. In addition, issuers must be sure to separately tag the disclosures responsive to each of Items 402(v)(5)(i)-(iv), even if the disclosures are combined into one graph or table in order to avoid drawing a comment. ƒ Financial Statements: To the extent that an issuer changes the XBRL element used to tag a particular line item from period to period, the issuer could receive a comment from the SEC Staff asking for the analysis behind why the change in element was appropriate and asking for period to period consistency going forward. In addition, if an issuer utilizes a custom tag rather than an XBRL element consistent with US GAAP, the issuer can expect the SEC Staff to ask for justification as to why the US GAAP tag is not applicable or to switch to the applicable US GAAP tag starting with the next filing. ƒ Inline XBRL Tagging: To the extent that a filer does not properly utilize Inline XBRL tagging for all required disclosures in a filing, the issuer could trigger a comment from the SEC Staff asking for it to file an amendment to the filing to include the applicable Inline XBRL presentation. Takeaway: The SEC is laser focused on ensuring that issuers are (1) tagging all disclosures required to be tagged in the applicable XBRL or Inline XBRL format and (2) consistently tagging items quarter-over-quarter and throughout a particular filing. To the extent that an issuer does not properly tag its disclosures, it can expect to draw an SEC comment. Form 10-Q Prep The end of calendar year-end companies’ third-quarter is just around the corner. As issuers start their Form 10-Q preparations, they should keep in mind the below considerations. Applicable Deadlines First things first, the below deadlines are applicable to Form 10-Q filings for the quarter ending September 30, 2023: Filer Type Deadline Large Accelerated Filer Thursday, November 9, 2023 Accelerated Filer Thursday, November 9, 2023 Non-Accelerated Filer Tuesday, November 14, 2023 Insider Trading Disclosures This is the second quarter that new Item 408(a) of Regulation S-K disclosure regarding insider trading plans is required for issuers (other than SRCs). However, SRC’s delayed compliance is rapidly coming to a close, and such filers will need to include Item 408(a) quarterly disclosures in their applicable filing for the quarter ending December 31, 2023 (i.e., Form 10-K for calendar yearend companies and Form 10-Q for other companies). As a threshold matter, issuers need to determine whether any of their officers or directors have adopted, terminated or modified any trading arrangements intending to qualify for the affirmative defense conditions of Rule 10b5-1(c) (i.e., Rule 10b5-1 plans) or “non-Rule 10b5-1 trading arrangements” (as defined by new Item 408(c)) of Regulation S-K between July 1st and September 30th. As a reminder, modified plans are treated as the termination of the existing plan and adoption of a new plan. If any officers or directors adopted, terminated or modified any such trading arrangements, then the issuer’s Form 10-Q must include disclosure (other than pricing information) regarding the material terms of the trading arrangement. Even if there were no trading arrangements triggering Form 10-Q disclosure obligations during the quarter, we recommend issuers include language indicating as such in their Form 10-Q filings as a best practice. The parallel disclosure for issuers required by Item 408(d) of Regulation S-K regarding issuers’ adoption, termination or modification of Rule 10b5-1 trading plans will not be required in this quarter’s filing, but will need to be included in the issuer’s applicable filing for next quarter (i.e., Form 10-K for calendar year-end companies or Form 10-Q for other companies). For additional information regarding the insider trading rules, please see our client alert. 3 Public Company Watch Key Issues Impacting Public Companies XBRL Disclosures Per the SEC’s signaling in its sample comment letter regarding issuers’ XBRL disclosures, the SEC will be reviewing filings for compliance with XBRL tagging requirements. Issuers should set aside time to review their filings for compliance, including to ensure that any custom tags are justifiable and reviewing for internal and quarterly consistency. In addition, disclosure responsive to Item 408(a) of Regulation S-K should be tagged utilizing Inline XBRL. China-Specific Disclosures Issuers should keep in mind the SEC’s sample comment letter to companies regarding China-specific disclosures. In particular, to the extent that an issuer has operations, or works with third-parties who have operations, in the Xinjiang Uyghur Autonomous Region, the issuer should consider whether the Uyghur Forced Labor Prevention Act and its restriction on the importation of goods from the Xinjiang Uyghur Autonomous Region, has had a material impact on its operations, business segments, products or lines of services. If so, the material impacts should be described in the issuer’s MD&A. Also, companies based in China or that have a majority of their operations in China should consider whether any risk factor disclosure may be appropriate regarding any material impacts that “intervention” or “control by” the People’s Republic of China might have on the company or its securities. Other Updates As part of their quarterly process, issuers should be considering whether any updates to their risk factor disclosure, forward-looking statement disclaimer or other forward-looking disclosure or MD&A are needed. As a reminder, Form 10-Q risk factor disclosure is limited to material changes from the risk factor disclosure included in the issuer’ Form 10-K, and the SEC discourages issuers from reiterating their Form 10-K risk factors in response to Form 10-Q’s Part II Item 1A disclosure, although issuers that frequently conduct offerings of their equity securities may find it preferable to repeat their updated risk factors in their Form 10-Q. For the quarter ending September 30, 2023, issuers should keep in mind the following pertinent matters: ƒ Effects of sustained high interest rates and inflation on the financial and capital markets and related implications on the issuer’s ability to borrow funds or refinance existing indebtedness; ƒ Choppiness in the capital markets and potential impacts on the issuer’s ability to raise funds in the public or private markets; ƒ Downgrading of the United States’ credit rating, and the issuer’s preparedness to manage the related political risk; ƒ Lingering impacts of the turmoil in the banking and financial services sector; ƒ Continued evolution and use of machine learning and generative AI, including risks arising from insufficient human oversight of AI or a lack of controls and procedures monitoring the use of AI in day-to-day operations as well as from potential future competitive disadvantages related to a lack of investment in AI tools; ƒ Effects stemming from long-term reliance on hybrid work arrangements, including impacts on productivity and profitability, as well as on operating expenses and overhead costs and / or risks related to return to office programs, including their impact on workforce retention and issues stemming from non-compliance; ƒ Climate-related or natural disaster-related events like the wild-fires in Maui or increases in the cost of insurance coverage for entities with operations in high fire, hurricane or flood risk areas; ƒ Current geopolitical conditions, including the ongoing Russia-Ukraine War and conflict between China and Taiwan; ƒ ESG-related matters, including the pending SEC rules on climate-related disclosures and the new International Financial Reporting Standards sustainability and climate-related disclosure standards; and ƒ Impacts on the issuer’s supply or distribution chains related to the above factors or otherwise. Issuers should also consider industry-specific and geography-specific developments, for example: ƒ Issuers in the entertainment and media space should consider the ongoing WGA and SAG-AFTRA strike; ƒ Issuers in the residential real estate space should consider the impacts of the challenging housing market; 4 Public Company Watch Key Issues Impacting Public Companies ƒ Issuers that do business in California should consider the potential effects of proposed Senate Bill 253, the Climate Corporate Data Accountability Act and Senate Bill 261, Greenhouse Gases: Climate-Related Financial Risk and the issuer’s ability to prepare the required disclosures; and ƒ Issuers in the banking industry should review their liquidity disclosures in their MD&A and their interest rate risk and sensitivity disclosures in their Quantitative and Qualitative Disclosures About Market Risk in light of the Division of Corporation Finance’s focus on these disclosures coming out of the bank failures earlier this year. SEC Staff Issues New C&DIs Related to Share Repurchase Rules On August 30, 2023, the SEC Staff issued three CD&Is related to new Form F-SR, which was introduced with the final share repurchase rules. Generally, foreign private issuers (FPIs) will be required to file Form F-SR within 45 days after the end of the FPI’s fiscal quarter, and it will contain disclosure regarding daily quantitative repurchase data throughout the quarter. However, Form F-SR need not be filed until the first full fiscal quarter that begins on or after April 1, 2024. The C&DIs provide that: ƒ Form F-SR need not be filed with respect to a quarter in which neither the FPI nor an affiliated purchaser repurchased any of the issuer’s equity securities, even if directors or senior management engaged in purchases or sales during the quarter (which would trigger the checkbox requirement on the cover of the form). ƒ Form F-SR should be filed for the fourth quarter of a fiscal year (in addition to all other quarters in which repurchases occurred). SEC Brings and Settles Its First Non-Fungible Token Enforcement Action Summary: On August 28, 2023, the SEC settled charges against Los Angeles-based media company Impact Theory LLC (“Impact Theory”), for offering and selling unregistered securities, in this case non-fungible tokens (“NFTs”), in violation of Sections 5(a) and 5(c) of the Securities Act. In the Matter of Impact Theory, LLC, Release No. 11226 (Aug. 28, 2023) (the “Order”). This is the SEC’s first NTF enforcement action. Facts: Specifically, the SEC alleged that from October 13, 2021 to December 6, 2021, Impact Theory offered and sold NFTs that Impact Theory referred to as “Founder’s Keys,” raising approximately $29.9 million worth of ether from at least hundreds of investors. In advance of the offering, Impact Theory publicly stated that it would deliver “tremendous value” to KeyNFT purchasers. Impact Theory also stated that it would use the offering proceeds for “development,” “bringing on more team,” and “creating more projects.” Impact Theory invited potential investors to view the purchase of a KeyNFT as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts. The SEC alleged that these NFTs were investment contracts, and therefore securities, pursuant to the test laid out in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). The U.S. Supreme Court’s “Howey test” and subsequent case law have found that an “investment contract” exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. Settlement: Impact Theory neither admitted nor denied the SEC’s findings but agreed to pay (1) disgorgement of $5,120,718.27, (2) prejudgment interest of $483,195.90, and (3) a civil money penalty of $500,000. Impact Theory also repurchased approximately $7.7 million of KeyNFTs from investors as part of remedial efforts prior to the settlement, and agreed to destroy all KeyNFTs in its possession or control within 10 days of the date of the Order. Dissent: Notably, on the same day, Commissioners Hester M. Peirce and Mark Uyeda publicly issued a dissent, stating that (1) they disagreed with the application of the Howey analysis and (2) the matter raises larger questions with which the SEC should grapple before bringing additional NFT cases (the “Dissent”). First, the Dissent disagreed that the “handful of company and purchaser statements cited by the order” were the “kinds of promises that form an investment contract” under Howey. The Dissent compared Impact Theory to “people that sell watches, paintings, or collectibles along with vague promises to build the brand and thus increase the resale value of those tangible items,” against which the SEC does not bring enforcement actions. Second, the Dissent stated that the SEC should have considered the number of difficult question raised by NFTs and issued guidance before bringing an enforcement action. Takeaway: The SEC continues to take an aggressive and broad view that crypto assets, including, for the first time, NFTs, are “securities.” The SEC is closely monitoring statements made to investors regarding NFTs. 5 Public Company Watch Key Issues Impacting