Winter 2024-2025 Corporate Communicator

Dear clients and friends,

We present our traditional year-end issue of Snell & Wilmer’s Corporate Communicator to help you prepare for the upcoming annual report and proxy season. This issue highlights SEC reporting and corporate governance considerations that will likely be important this annual meeting season, as well as in the upcoming year. We are also pleased to present our 2024 Tombstone, which highlights selected deals that the firm’s Corporate & Securities Practice Group helped clients with during the year.

During 2025, members of our Corporate & Securities Practice Group will continue to publish the Corporate Communicator, host business presentations, and participate in seminars that address key issues of concern to our clients. First on the calendar is our Seventeenth Annual Proxy Season Update, on Thursday, January 9, 2025. This year’s event will take place at our office located at Cityscape in Downtown Phoenix.

As always, we appreciate your relationship with Snell & Wilmer, and we look forward to helping you make 2025 a successful year.

Very truly yours,

Snell & Wilmer’s Corporate & Securities Group

RECENTLY ADOPTED RULES 
 
Insider Trading Policies. As previously discussed in our Winter 2022-2023 Corporate Communicator, the Securities and Exchange Commission (“SEC”) adopted final rules in December 2022 relating to insider trading policy disclosures. As a reminder for December 31 fiscal year-end companies (including smaller reporting companies), compliance with the requirements pursuant to Item 408(b) of Regulation S-K begins with the upcoming Form 10-K for the fiscal year ended December 31, 2024. 
 
Item 408(b)(1) requires a company to disclose whether it has adopted insider trading policies and procedures governing the purchase, sale, and/or other dispositions of their securities by directors, officers and employees, or the company itself, that are reasonably designed to promote compliance with insider trading laws, rules and regulations, and any listing standards applicable to the company. Alternatively, if the company has not adopted such policies and procedures, then it must explain why it has not done so. 
 
As with other information required by Part III of Form 10-K, the disclosures required under Item 408(b)(1) in the Form 10-K may be incorporated by reference from a company’s definitive proxy statement (which also requires the Item 408(b) disclosure under Item 7(b) of Schedule 14A) so long as the definitive proxy statement is filed with the SEC no later than 120 days after the end of the fiscal year covered by the Form 10-K. Further, such disclosures must be tagged in Inline eXtensible Business Reporting Language (“Inline XBRL”).
 
Additionally, if a company has adopted insider trading policies and procedures, then Item 408(b)(2) and Item 601(b)(19) of Regulation S-K require the company to file such policies and procedures as Exhibit 19 to its Form 10-K. Given this filing requirement, companies may want to take this opportunity to reevaluate their insider trading policies and procedures prior to filing to determine whether any updates should be made, for example, to address the “shadow trading” issues raised by the recent SEC v. Panuwat ruling that we discussed in our Fall 2024 Corporate Communicator, as well as to address gift transactions in light of the SEC’s position that gifts may be subject to Section 10(b) liability.

Disclosures Related to Option Grant Policies and Options Granted in Proximity to Disclosure of Material Nonpublic Information (“MNPI”). In addition to including the insider trading policy disclosures and exhibit filing requirements discussed above, pursuant to Item 402(x) of Regulation S-K, companies (including smaller reporting companies) will also need to begin providing certain narrative and tabular disclosures regarding option grant policies and options granted in proximity to disclosure of MNPI. Compliance with these disclosure requirements will begin with the upcoming Form 10-K for the fiscal year ended December 31, 2024. See also our Winter 2022-2023 Corporate Communicator.

Item 402(x)(1) requires a company to discuss its policies and practices with respect to the timing of awards of stock options, stock appreciation rights (“SARs”), and/or similar option-like instruments in relation to the company’s release of MNPI. This narrative discussion should address, for example, how the board determines when to grant such awards (e.g., whether the awards are granted on a predetermined schedule); whether and how the board or compensation committee takes MNPI into account when determining the timing and terms of such awards; and whether the company has timed the disclosure of MNPI for the purpose of affecting the value of executive compensation.

Item 402(x)(2) requires a company to provide certain information in tabular form about each stock option, SAR, or similar instrument granted to each of the company’s named executive officers (“NEOs”) within a period (i) starting four business days before the filing of a Form 10-Q or Form 10-K, or the filing or furnishing of a Form 8-K that discloses MNPI (other than a Form 8-K disclosing a material new option award grant under Item 5.02(e)) and (ii) ending one business day after the filing or furnishing of such report. The required disclosures for each NEO, on an award-by-award basis, include:

The disclosures required under Item 402(x) in the Form 10-K may be incorporated by reference from a company’s definitive proxy statement (which also requires the Item 402(x) disclosure under Item 8 of Schedule 14A) as discussed above. Further, such disclosures must be tagged in Inline XBRL.
 
EDGAR Next. On September 27, 2024, the SEC adopted rule and form amendments relating to certain technical changes to the SEC’s Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system. These changes, collectively referred to by the SEC as “EDGAR Next,” are intended to improve the security of EDGAR, enhance filers’ ability to manage their EDGAR accounts, and modernize connections to EDGAR. The following is a summary of key changes that filers, including entity and individual filers, should be aware of:

As filers begin planning their transition to EDGAR Next compliance, below are some key dates and suggested action items to consider and keep in mind:

CLIMATE DISCLOSURE RULES – STATUS UPDATE
 
As discussed in our Summer 2024 Corporate Communicator, following the adoption of final climate disclosure rules by the SEC on March 6, 2024, on April 4, 2024, due to litigation initiated immediately following the adoption of such rules, the SEC stayed the effectiveness of the climate disclosure rules in order to facilitate the orderly judicial resolution of the challenges brought before the U.S. Circuit Court of Appeals for the Eighth Circuit. In its order issuing the stay, the SEC noted that it was not departing from its view that the final climate disclosure rules are consistent with applicable law and within its authority to require the disclosure of information important to investors in making investment decisions.
 
On August 6, 2024, the SEC filed a consolidated brief in support of the climate disclosure rules, which responded to challenges raised by the petitioners, including (1) whether the SEC has statutory authority to adopt the climate disclosure rules, (2) whether the SEC acted reasonably in adopting the climate disclosure rules, and (3) whether the climate disclosure rules are consistent with the First Amendment of the United States Constitution.
 
Statutory Authority to Adopt Climate Disclosure Rules. The SEC argued that it has authority to adopt the climate disclosure rules pursuant to authority delegated to it by Congress under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Pursuant to such delegated authority, the SEC is authorized to require disclosure of information that protects investors by facilitating informed investment and voting decisions, particularly information that helps investors assess the values and risks of an investment. The SEC characterized the information required to be disclosed under the climate disclosure rules as informative about a company’s business, operations, and financial performance, thus enabling investors to better understand the value and risks of an investment in the company, as opposed to a means for the SEC to influence companies’ approaches to climate-related risks or to protect the environment. 
 
Citing Loper Bright Enterprises v. Raimondo, the U.S. Supreme Court’s decision issued on June 28, 2024 overruling Chevron v. Natural Resources Defense Counsel and ending the doctrine of judicial deference to federal administrative agencies’ reasonable interpretations of ambiguous statutes, the SEC identified several sections under the Securities Act and the Exchange Act that “expressly delegate” to the SEC “discretionary authority” both to “fill up the details of a statutory scheme” and to “regulate subject to the limits imposed by a term or phrase that leaves agencies with flexibility.”
 
The SEC further argued that the major questions doctrine does not apply as the SEC relied on core provisions of the securities laws that expressly authorize it to promulgate disclosure requirements to facilitate informed investment and voting decisions. Under the major questions doctrine, invoked by the U.S. Supreme Court in 2022 to support its holding in West Virginia v. Environmental Protection Agency, if an agency seeks to regulate an issue of political and economic significance, its action must be supported by clear congressional authorization. Further, the SEC argued, even if climate change is a subject of public discourse, the climate disclosure rules are not designed to address climate change, do not require disclosure of information unrelated to investment and voting decisions, and do not circumvent congressional limitations on the SEC’s authority.
 
Reasonableness of Adopting Climate Disclosure Rules. The SEC argued that it had satisfied procedural requirements under the Administrative Procedure Act in adopting the climate disclosure rules, including by substantiating the need for the climate disclosure rules, which was based on an extensive evidentiary record revealing that information that companies currently provide is insufficiently detailed, insufficiently comparable, and insufficiently reliable to meet investors’ needs to be informed about the impact of climate-related risks on a company’s operations and financial performance.

First Amendment. The SEC argued that the climate disclosure rules are consistent with the First Amendment, and readily pass muster under the lesser First Amendment scrutiny applied to commercial speech. Further, the SEC argued that mandated climate disclosures would survive intermediate scrutiny as set forth in Central Hudson Gas & Electric Corp. v. Public Service Commission of New York if it “directly advances” a “substantial” government interest and is “not more extensive than is necessary to serve that interest.”
 
Several reply briefs filed during September 2024 by petitioners continued to challenge the SEC’s statutory authority in adopting the climate disclosure rules, including under Loper, which was issued after the petitioners had filed their initial briefs challenging the climate disclosure rules, and the major questions doctrine, to assert that climate disclosure rules are an impermissible arbitrary and capricious change from agency practice lacking the reasoned explanation for such change supported by substantial evidence, and characterizing the SEC’s climate disclosure rules as impermissibly compelling content-based controversial disclosures in violation of the First Amendment. In challenging the SEC’s authority, certain reply briefs drew on Loper to argue that the SEC’s interpretation that the Securities Act and Exchange Act authorize it to adopt the climate disclosure rules is not entitled to judicial deference.
 
With the end of the judicial deference doctrine, the Eighth Circuit will now need to review the validity of the climate disclosure rules using their own independent judgment rather than deferring to the SEC’s reasonable interpretation of the Securities Act and the Exchange Act, which would likely result in the passing of a significant amount of time before the final form of the climate disclosure rules will be determined. Moreover, that decision then could be appealed to the U.S. Supreme Court, causing more delay. Against this backdrop, the upcoming change in Presidential administration and shift in the political balance of power of the SEC is expected to result in less enthusiasm on the part of the SEC to continue to defend its adoption of the climate disclosure rules.
 
Despite the recent developments with the SEC’s climate disclosure rules, as mentioned in our Winter 2023-2024 Corporate Communicator, issuers should continue to follow guidance set forth under the SEC’s February 2010 Commission Guidance Regarding Disclosure Related to Climate Change (the “SEC Climate Guidance”). In addition, issuers are reminded of the SEC’s Sample Letter to Companies Regarding Climate Change Disclosures (the “Climate Sample Letter”) issued in 2021, which builds on the SEC Climate Guidance, each of which was discussed in greater detail in our Winter 2021-2022 Corporate Communicator. Furthermore, issuers should revisit their climate-related disclosures in light of broader investor expectations for more robust climate-related disclosures. 

On August 26, 2024, the SEC issued an order approving proposals made by The Nasdaq Stock Market LLC (“Nasdaq”) to amend Nasdaq Rules 5605, 5615 and 5810 regarding phase-in schedules for certain corporate governance requirements and the applicability of certain cure periods following the expiration of phase-in periods. Such amendments are generally similar to those previously approved for the New York Stock Exchange.
 
Phase-In Schedules
Generally, the amendments update the phase-in schedules for the various requirements that Nasdaq-listed companies maintain a board of directors comprised of a certain number of independent directors and establish and maintain audit, compensation and nominations committees comprised of a minimum number of independent directors meeting prescribed attributes and qualifications. These phase-in schedules vary and apply to various circumstances, including: following an initial public offering; emerging from bankruptcy; transferring from National Securities Exchanges and companies listing securities previously registered under Section 12(g) of the Securities Act; in connection with carve-out or spin-off transactions; ceasing to qualify as a foreign private issuer; and ceasing to be a controlled company. 

Noncompliance During the Phase-In Period
The Nasdaq amendments codify Nasdaq’s policy that a company that demonstrates compliance with a requirement during a phase-in period but subsequently falls out of compliance with such requirement prior to the end of the phase-in period will not be considered deficient until the end of the phase-in period.
 
Unavailability of Cure Periods Following the Expiration of Phase-In Periods
The Nasdaq amendments also codify its position that a company relying on any phase-in period under Nasdaq Rule 5615(b) will not be eligible for a cure period under Rule 5605(b)(1), Rule 5605(c)(4), or Rule 5605(d)(4) immediately after the phase-in period under Rule 5615(b) expires, unless the company complied with the majority independent board requirement, audit committee composition requirement, or the compensation committee composition requirement, as applicable, during the phase-in period but later fell out of compliance.

We expect to see shifts in the SEC’s regulatory initiatives under the second Trump administration. As announced by the SEC on November 21, 2024, Chair Gary Gensler will step down from the SEC on January 20, 2025, Inauguration Day. Democrat Commissioner Jaime Lizárraga also plans to depart from the SEC, effective January 17, 2025. It is anticipated that President-elect Trump will designate either Commissioner Hester Peirce or Commissioner Mark Uyeda, both Republicans, as Acting Chair until a successor is nominated by President-elect Trump and confirmed by the Senate. Upon Chair Gensler’s and Commissioner Lizárraga’s departures from the SEC, the balance of power at the SEC will include two Republican Commissioners and one Democrat Commissioner, Carolyn Crenshaw. On December 18, 2024, the Senate Committee on Banking, Housing, and Urban Affairs (the “Senate Banking Committee“) canceled the vote to renominate Commissioner Crenshaw for another five-year term. Given the Senate’s planned adjournment on December 20, 2024, and a Republican-controlled Congress taking over in January 2025, Commissioner Crenshaw’s reappointment appears unlikely.

Further, on December 4, 2024, President-Elect Donald Trump nominated Paul Akins to succeed Chair Gensler. Mr. Atkins previously served as an SEC Commissioner from 2002-2008, during which time Commissioners Peirce and Uyeda served as Mr. Atkins’ Counsel. It is anticipated that, if confirmed as the next Chair, Mr. Atkins will have differing priorities from Chair Gensler, including moving away from using enforcement as a way to set regulatory policy and re-examining rules enacted under Chair Gensler, such as the climate disclosures rules, which he has questioned.
 
Climate Disclosure Rule. As discussed above, in March 2024, the SEC adopted final climate disclosure rules to take effect as early as the beginning of the 2025 fiscal year. The SEC stayed the final rules on April 4, 2024, due to litigation immediately following adoption of such rules. It is expected that the SEC will face political pressure under the Trump administration to back away from pursuing the climate disclosure rules.
 
Share Repurchase Disclosure Modernization Rule. In December 2023, the U.S. Court of Appeals for the Fifth Circuit vacated the SEC’s Share Repurchase Disclosure Modernization Rule, which the SEC adopted in May 2023 and would have required companies to provide new disclosures regarding share repurchases on a daily basis. We do not expect the SEC under the Trump administration to propose a new share repurchase disclosure rule that addresses the defects identified by the Fifth Circuit.
 
ESG-related Regulations. As set forth on the SEC’s Fall Reg-Flex 2024 agenda, the SEC is now targeting October 2025 as the release date for its proposed rule amendments to enhance disclosures regarding human capital management and diversity of board members and nominees.
 
As was done at the start of the first Trump administration, and as is a routine action taken by presidential administrations when there is a change in party control of the White House, it is expected that a memorandum will be issued at the start of the second Trump administration directing executive departments and independent agencies, including the SEC, to freeze pending regulations, withdraw proposed regulations that have been sent to the Office of the Federal Registrar (the “OFR”) but have not yet been published, and postpone the effective dates of regulations that have been published in the OFR but have not yet taken effect.
 
As the proposed ESG-related enhanced disclosure rules have not yet been released, we believe a Republican-led SEC would abide by such regulatory memorandum and refrain from having such rules continue through the rulemaking processes.
 
Crypto Industry and a Federal Regulatory Framework. The crypto industry has long sought clearer regulation of various digital asset investment vehicles and financial instruments. During his campaign, President-elect Trump showed support for the crypto industry. In May 2024, the House of Representatives passed the Financial Innovation and Technology for the 21st Century Act (“FIT21”) which would amend securities and commodities laws to address the regulation of digital assets and, among other things, would clarify the responsibilities of the SEC and Commodity Futures Trading Commission with respect to digital assets. Although the future of FIT21 was uncertain prior to Trump’s election, with Republicans controlling both the House and the Senate, we can expect that a more workable federal regulatory framework governing digital assets may be developed and, eventually, implemented whether through federal legislation or SEC rulemaking, or both.

SEC COMMENT LETTER TRENDS

During the 12 months ended June 30, 2024, the first and second most common comment areas by the SEC were management’s discussion and analysis of financial condition and results of operations (“MD&A”) (also number 1 in 2023), followed by non-GAAP financial measures (also number 2 in 2023).¹ In fact, within the top 5 areas of comment, there was little movement with segment reporting and revenue recognition being the numbers 3 and 4 areas of comment, respectively (also, numbers 3 and 4 in 2023, respectively).² In 2024, comments relating to goodwill and intangible assets were the fifth most commented on topic, compared to climate change being number 5 in 2023.³ Other frequent areas of comment included: business combinations; risk factors; contingencies; climate-related disclosures and accounting error corrections, internal control over financial reporting, and disclosure controls and procedures.⁴ According to Ernst & Young’s analysis, the number of registrants receiving comments from the SEC staff in 2024 was relatively consistent with 2023, although 2023 was noticeably elevated compared to the 2020-2022 periods.⁵ 

The most significant area of SEC staff comment within MD&A was results of operations. According to Ernst & Young, the SEC staff often requests companies to explain their operating results with greater specificity, including the underlying drivers for each material factor that affected their earnings, or that is reasonably likely to affect future results of operations.⁶ As we have indicated in prior editions, the SEC staff continues to request that companies provide more robust forward-looking information about known trends and uncertainties. Other frequently commented on topics within MD&A include key performance indicators (“KPIs”)⁷, liquidity and capital resources⁸ and critical accounting estimates.⁹ 

The SEC staff continues its focus on non-GAAP financial measures, and 2024 was no different. Similar to 2023, many of the SEC staff’s comments in 2024 about non-GAAP financial measures focused on the December 2022 updates to the SEC staff’s Non-GAAP Financial Measures C&DIs, specifically C&DI 100.01.¹⁰ For reference, C&DI 100.01 provides that although not explicitly prohibited, presenting a non-GAAP performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business is one example of a measure that could be misleading. In this regard, many of the SEC staff’s comments inquired about whether operating expenses excluded from performance measures were “normal” or “recurring.” Examples of adjustments that the SEC staff have objected to include inventory-related valuation, reserves and impairment charges, certain legal and regulatory expenses, cash-based compensation costs and costs to be a public company.¹¹ 

According to Ernst & Young, consistent with prior years, the SEC staff’s comments on climate-related disclosures continue to align with the Climate Sample Letter which was published in 2021.¹² As we have indicated previously, as more and more companies prepare and publish extensive reports covering a variety of environmental, social, and governance (“ESG”) matters (sometimes titled “sustainability” reports), companies should consider that the SEC staff may review these reports and compare the disclosure in the sustainability report to the climate-related disclosures in the company’s SEC filings.

Finally, the SEC staff continues to request additional information and scrutinize materiality assessments made by companies that disclose the correction of an immaterial error in previously issued financial statements (i.e., a “little r” restatement vs. a “Big R” restatement).¹³ Related, the SEC staff continues to question conclusions that internal control over financial reporting and/or disclosure controls and procedures are effective where there exists the correction of a prior period error, including “little r” restatements.¹⁴

ACCOUNTING DISCLOSURES UPDATE

The following is a summary of two recently adopted Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board. Readers are urged to consult with their relevant accounting experts for further questions and in-depth guidance. 

Expanded Segment Disclosures. ASU 2023-07¹⁵ expands disclosures that public companies must make about their reportable segments in the financial statement footnotes included in filings with the SEC. A key change is the requirement to disclose, on an annual and interim basis, “significant segment expenses,” that are regularly provided to the company’s chief operating decision maker (“CODM”) and that are included within each segment’s reported measure of segment profit or loss. A public company must also disclose “other segment items,” which represents the amount needed to reconcile segment revenues, less the specifically enumerated “significant segment expenses”, to the reported measure of segment profit or loss. These new disclosures are required in annual and interim financial statements and are required for each reportable segment. ASU 2023-07 also requires disclosure in the financial statement footnotes of the title and position of the CODM and how the CODM assesses segment performance and allocates resources using the reported measures of segment profit or loss. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. 

Disaggregated Expense Disclosures. ASU 2024-03¹⁶ requires additional disclosure in the financial statement footnotes of the specific types of expenses included in the expense captions presented on the face of the income statement, as well as additional disclosures about selling expenses. In summary, ASU 2024-03 requires that in each interim and annual reporting period a public company disclose:

ASU 2024-03 is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. 

INSTITUTIONAL SHAREHOLDER SERVICES (“ISS”)

Poison Pill
ISS has updated its list of factors it considers when evaluating how to vote for board nominees where a board has adopted an initial short-term poison pill (with a term of one year or less) without shareholder approval. ISS will now consider, among other factors previously considered, the trigger threshold and other terms of the poison pill, the context in which the pill was adopted (such as the company’s size and stage of development, sudden changes in its market capitalization, and extraordinary industry-wide or macroeconomic events), and the company’s overall track record on corporate governance and responsiveness to its shareholders.

SPAC Extension Proposal
ISS has revised its approach to voting on SPAC extension proposals. While previously, ISS took a case-by-case approach to evaluating such proposals, for the 2025 Proxy Season, it will generally support requests to extend the SPAC termination date, if within one year from the SPAC’s original termination date.

General Environmental Proposals and Community Impact Assessment
ISS has updated its list of factors it considers by the ISS when evaluating how to vote for requests for reports on policies or the potential social or environmental impact of company operations. ISS will now consider, among other factors previously considered, the alignment of the company’s current disclosure of applicable policies with relevant, broadly accepted reporting frameworks.

GLASS LEWIS

Glass, Lewis & Co. (“Glass Lewis”) has issued its annual update to its voting guidelines for the 2025 Proxy Season. At a high level, the updates focused on board and committee oversight and compensation awards. Most notably, Glass Lewis has stated its first policy view on artificial intelligence (“AI”)-related issues. In addition, Glass Lewis has clarified several of its previously stated positions.

Board Oversight of AI
In light of the rise in use of AI, Glass Lewis has formalized its position that boards should be cognizant of, and take steps to mitigate exposure to, ethical issues and material risks that could arise from the use or development of AI. Glass Lewis suggests that companies using or developing AI technologies should consider engaging in continued board education of AI-related matters and appointing directors with AI expertise. Further, Glass Lewis believes that all companies that develop or use AI in their operations should provide clear disclosure concerning the role of the board in overseeing AI-related issues.
However, absent material incidents related to a company’s use or management of AI-related issues, Glass Lewis will generally not make voting recommendations on the basis of a company’s oversight of, or disclosure concerning, AI-related issues. In the event of any such material incidents, Glass Lewis will closely evaluate the board’s response to, and management of, such incident as well as any associated disclosures, and if the board’s response is found to be insufficient, may recommend against the reelection of all or select directors.

Change-in-Control Provisions
For the 2025 Proxy Season, Glass Lewis has expanded its position regarding change-in-control arrangements, stating its view that companies that allow for board committee discretion over the treatment of unvested awards should disclose a clear rationale for how such awards are treated, in the event a change in control occurs. However, this view does not currently impact any voting recommendations of Glass Lewis.

Clarifying Amendments
For the 2025 Proxy Season, Glass Lewis clarified three of its previously-stated positions. Glass Lewis has revised its discussion of board responsiveness to shareholder proposals, in order to reflect that when a shareholder proposal receives “significant” shareholder support (generally more than 30%, but less than a majority of votes cast), Glass Lewis believes the board should engage with shareholders and provide disclosure addressing its outreach initiatives and shareholder concerns.

Further, Glass Lewis has updated its discussions of reincorporations and executive compensation programs, emphasizing the holistic, case-by-case nature of its approach to each. For reincorporations, Glass Lewis considers, among other factors, changes in corporate governance provisions and applicable law (especially those relating to shareholder rights) and relevant financial benefits. For executive compensation programs, Glass Lewis considers, among other factors, the context of rationale, overall structure, overall disclosure quality, the program’s ability to align executive pay with performance and the shareholder experience, and the trajectory of the pay program resulting from changes introduced by the compensation committee.