On September 30, 2024, the Securities and Exchange Commission (“SEC”) filed a settled enforcement action against a former director of a public company (the “Company”) over claims that the director had failed to disclose his close personal friendship with a senior executive at the Company, leading to alleged misstatements in the Company’s proxy materials identifying him as an independent director from 2019 to 2023. Securities and Exchange Commission v. Craigie, Docket No. 1-24-cv-07382 (S.D.N.Y. Sept. 30, 2024). Without admitting or denying the allegations, the former director agreed to settle the claims which impose a five-year bar on him serving as an officer or director of a public company and require him to pay a civil penalty of $175,000. The Court approved this settlement on October 1, 2024.
The SEC’s complaint, filed in the Southern District of New York, alleges that the former director failed to disclose a close personal friendship with a member of the Company’s executive team. Specifically, the complaint alleges that the former director and the executive, along with their spouses, frequently vacationed together, domestically and internationally, and that the former director covered most of the travel expenses, totaling over $100,000. According to the SEC, in addition to concealing the close relationship from the board, the former director also instructed the executive to refrain from mentioning their relationship, and when the Company began a CEO succession process for which the executive was being considered, the former director allegedly shared confidential details with the executive to better position him for the position. The SEC claimed that the former director did these things while not disclosing the existence of this relationship in the Company’s annual director and officer questionnaires that required the disclosure of any material relationships with the Company or its management.
The SEC asserted that by concealing his relationship with the executive, the former director misled the board and shareholders regarding his independence, and as a result, the Company’s proxy statements in 2021 and 2022 contained false or misleading information by listing him as an independent director, in violation of Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9. The former director settled with the SEC without admitting or denying the allegations, agreeing to pay a civil penalty of $175,000 and being barred from serving as an officer or director for any registered company for five years.
Notably, the complaint makes clear that the Company itself first became aware of the relationship between the former director and executive in February 2023. Once known, the Company’s Board of Directors formed a Special Committee to investigate and quickly concluded that the former director had violated his obligations of confidentiality and candor under the Company’s Code of Conduct applicable to members of the Company’s Board of Directors and determined that the former director was not independent—conclusions that the Company disclosed in March 2023 in its 2023 proxy statement. In that same proxy statement, it was further disclosed that the former director would not be standing for re-election.
This case highlights the importance of directors and officer disclosing any relationships and other ties that may be seen to compromise their independence and impartiality. It also underscores the importance of company processes related to annual director and officer questionnaires that collect the information necessary to evaluate any such relationships and the need to remind directors and officers of the importance of sharing any changes or developments of information that is reported in the annual questionnaire as it happens.
Interestingly, the SEC’s complaint relied on the fact that the Board of Directors of the Company determined that the former director was not independent because of the relationships, which meant that prior proxy statement disclosures were incorrect. The SEC did not comment as to whether the nature of the specific relationship in question itself impaired the independence of the former director. The NYSE’s listing standards, which are applicable to the Company, provide a series of “bright line” tests for independence, but these tests, other than with respect to familial relationships, do not address the type of personal relationships in this matter. The NYSE listing standards do, however, require a board of directors to determine that a director has “no material relationship” with the listed company, so for a board of directors to properly assess the independence of each director it should have complete information. It is not unusual for independent directors to have preexisting relationships with executives, or to develop them once serving on boards. The existence of a relationship between an independent director and an officer of a company may not preclude a finding of independence. It is important for officers and directors to be transparent about these relationships so the board of directors can make informed independence determinations.
Links & Downloads
[View source.]
