SEC Penalizes Director for Misleading D&O Questionnaire Response
The SEC recently brought an enforcement action against a director for causing violations of the proxy rules by failing to disclose a close personal friendship with one of the company’s executives to whom the director leaked confidential board information. The director paid more than $100,000 for the director’s and executive’s families to vacation together. In the director’s D&O questionnaire response, he certified that he had no undisclosed relationship with management while failing to disclose his relationship with the executive. The director breached his duty of candor by concealing the relationship, and he breached his duty of confidence by leaking board information to the executive. The inaccurate D&O questionnaire responses resulted in misleading proxy statement disclosure that the director was independent. The director agreed to a civil penalty of $175,000, a five-year ban against serving as a public company director or officer, and a permanent injunction against further proxy statement violations.
Companies are confirming that their D&O questionnaires solicit all relevant information and reminding directors to respond accordingly. Latham’s 2025 form D&O questionnaires are available on Diligent and Nasdaq Boardvantage.
Activist Campaigns Target Small-Cap Companies, Poor Company Performance, and Lack of Capital Allocation Strategy
Activist investors continue to focus on small cap companies, which have seen increased activism activity compared to prior years, driven by an emergence of first-time activist investors initially aiming at smaller targets. Activists have also highlighted poor company share price and operational performance, as well as lack of company strategy around capital allocation and share repurchase programs given a slower “take private” environment in 2024. Many of the recent activist campaigns have focused on management changes, including replacing the CEO. Masimo Corporation was the target of activist Politan Capital, where over the course of two annual meetings, stockholders elected a board composed of a majority of directors nominated by the activist, rather than mere minority representation on the board. Activists have also made use of the universal proxy rules to target specific directors and put forth smaller slates.
Boards continue to identify company vulnerabilities and prepare protect-the-house activism readiness plans, including monitoring early warning signs of activism, engaging with stockholders, reviewing stock ownership filings and websites, and deploying market intelligence resources. For more information, reach out to Latham’s Shareholder Activism & Takeover Defense group.
Focus on Cyber Disclosure Highlights Reporting Challenges
Cyber disclosures continue to be a priority for the SEC staff, which is issuing comments on companies’ cyber-related disclosures. Areas of SEC comments have included cyber disclosures in companies’ annual reports on Form 10-K as well as technical compliance requirements under current reports on Form 8-K relating to material cyber incidents. The SEC staff’s comments have focused on how companies determined a cyber incident was material; impacts on business, financials, and operations; and the apparent inconsistency in some companies’ decisions to conclude no material impact in reports of material cybersecurity incidents under Item 1.05 of Form 8-K.
Companies are continuing to carefully evaluate quantitative and qualitative factors involved in determining materiality based on the SEC’s recent guidance, maintain strong incident response records, and refine their disclosure controls and procedures.
SEC Announces Enforcement Sweep of Non-Compliance in Stock Ownership Reporting
The SEC announced settlements with 23 corporate and individual defendants for failure to timely file beneficial ownership reports on Schedules 13D and 13G, as well as Forms 3, 4, and 5, marking the second SEC enforcement sweep in a year focused on delinquent filings. These settlements reflect the SEC’s continued focus on timely beneficial ownership reporting, with companies and individuals held responsible and paying money for inadvertent or minor violations. Companies along with directors and officers are reviewing beneficial ownership reporting procedures to ensure timely and accurate reporting.
Anti-ESG Sentiment Dampens ESG Initiatives
The increase in anti-ESG developments, including Rule 14a-8 shareholder proposals, reflects a divide among investors over the continued relevance of ESG in corporate strategy and governance. Companies are reexamining their ESG initiatives, particularly DEI programs, amid legal challenges and public scrutiny around ESG.
