Federal court dismisses some – but not all – of SEC’s complaint against SolarWinds

As originally reported in our November 2023 edition of One-Minute Reads, the Securities and Exchange Commission (SEC) announced charges against SolarWinds and its chief information security officer (CISO) for fraud and internal control failures relating to allegedly known cybersecurity risks and vulnerabilities. On July 18, 2024, Judge Paul A. Engelmayer of the US District Court for the Southern District of New York issued a 107-page opinion and order dismissing most of the case against SolarWinds and its CISO. This July 23 Cooley alert outlines how the court dismissed three of the five claims against SolarWinds and three of the seven claims against its CISO. The court dismissed all claims relating to the company’s SEC filings before, during and after the SUNBURST cyberattack, all claims based on press releases, blog posts and podcasts by the company and its CISO, and all claims that the company maintained insufficient internal accounting and disclosure controls for cybersecurity. The court did, however, permit a narrow set of claims to proceed, indicating that this case is not yet over.

SEC approves NYSE proposal to delist companies that change primary business

On July 24, 2024, the SEC issued an order granting accelerated approval to the New York Stock Exchange (NYSE) proposal to delist companies that change their primary business. Two amendments were made to the proposal since we last reported on it in our May 2024 edition of One-Minute Reads – including adding a requirement that if a company changes its primary business focus, it must promptly provide written notice of the change, along with clarifying that the delisting procedure applies where the new primary business focus is “substantially different” from the business engaged in at the time of initial listing.

Twenty-six firms settle with SEC for more than $390 million for recordkeeping failures

On August 14, 2024, the SEC settled charges with 26 broker-dealers, investment advisers, and dually registered broker-dealers and investment advisers for “widespread and longstanding failures by the firms and their personnel to maintain and preserve electronic communications.” According to the release, the SEC’s investigations found that each of the firms was engaging in “pervasive and longstanding use of unapproved communication methods,” otherwise known as off-channel communications. The release states that each of the firms “admitted that, during the relevant periods, their personnel sent and received off-channel communications that were records required to be maintained under the securities laws.”

Intelligize publishes update on shareholder activists’ AI efforts

In a recent article, “Shareholder Activists Lead the Way in Trying to Regulate Corporate AI,” Intelligize highlights efforts by shareholder activists to implement safeguards around managing artificial intelligence (AI) risks at companies by holding companies accountable for their use of AI through shareholder proposals. The report examined shareholder proposals and their successes and failures, no-action requests by companies seeking to exclude proponents’ AI-related proposals from their 2024 proxy materials (along with the SEC’s responses), companies’ 2024 definitive proxy statements disclosing proponents’ AI-related proposals, and shareholder voting results.

The report revealed that activists believe that current actions being taken by companies to manage the risks of AI are insufficient. Specifically, activists believe the following to be areas of concern:

• Lack of AI-related ethical guidelines
• Inadequate AI oversight by boards
• Missing plans of action with respect to limiting and remediating harms from generative AI misinformation
• Missing independent third-party assessments of AI’s impact on human rights

Delaware Supreme Court considers advance notice bylaws

As detailed in this August 7 PubCo post covering Kellner v. AIM ImmunoTech, the Delaware Supreme Court outlined “a two-part framework for judicial consideration of advance notice bylaws in the event of a challenge to their adoption, amendment or enforcement.” The framework includes that the court should first “evaluate ‘whether the advance notice bylaws are valid as consistent with the certificate of incorporation, not prohibited by law, and address a proper subject matter,’” and should second “evaluate ‘whether the board’s adoption, amendment, or application of the advance notice bylaws were equitable under the circumstances of the case.’”

In the case at hand, Ted Kellner was a major stockholder who – together with other stockholders – sought to nominate a slate of directors to serve on the AIM board in 2023. The group had tried to nominate a slate of directors at previous meetings but were rejected under the then-existing bylaws. Following these efforts, the company adopted additional bylaw amendments to further dissuade activist activity. In 2023, the board rejected the director nominations from Kellner on three separate occasions based on failing to meet the new requirements of the company’s advance notice bylaw provisions. The Delaware Supreme Court took up the case, holding that: “(1) one ‘unintelligible’ bylaw is invalid; (2) the remaining amended advance notice bylaws subject to this appeal are valid because they are consistent with the certificate of incorporation, not prohibited by law, and address a proper subject matter; and (3) the AIM board acted inequitably when it adopted the amended bylaws for the primary purpose of interfering with, and ultimately rejecting, Kellner’s nominations. Thus, the remaining bylaws challenged on appeal are unenforceable.”

Spencer Stuart publishes results of director time commitment survey

In July, Spencer Stuart released the results of its 2024 Director Pulse Survey on time commitment, which surveyed 751 directors of US companies (61% of whom serve on public company boards). On average, directors reported spending less time on board work compared to the 2023 survey, with directors spending approximately 200 hours per year on board work as opposed to 278 hours reported last year. This number, however, should be noted more closely due to significant differences in the sample size of the two surveys (the 2023 survey included only 95 respondents). Directors reported that the most time-consuming topics were:

• Long-term strategy and performance
• CEO succession
• Talent and human capital
• Artificial intelligence
• Cybersecurity

In contrast, respondents believed that the following areas merited less discussion time:

• Environmental, social and governance (ESG)
• Diversity, equity and inclusion (DEI)
• Activism
• Geopolitical issues

For meetings, respondents stated that companies should limit presentations and prioritize discussions, along with properly allocating time for executive sessions.

Nasdaq proposes rule to limit companies’ use of reverse stock splits to regain compliance

Nasdaq issued a new rule proposal that would accelerate the delisting process for companies that fail to meet the minimum bid requirements. Under the proposal, a company would be suspended from trading if it has been out of compliance with the $1 bid price requirement for more than 360 days. In addition, the proposal would modify the listing standards to immediately send a delisting determination to a company that becomes noncompliant with the minimum bid price requirement and has effected a reverse stock split within the prior one-year period. These companies would not receive any compliance period – including the automatic 180-day compliance period currently available. For further reading, see this August 12 PubCo post.