August One-Minute Reads
SEC sets compliance dates for cybersecurity disclosure rules
Our July One-Minute Reads discussed the new cybersecurity disclosure rules adopted by the Securities and Exchange Commission, with compliance dates tied to the publication of the final rules in the Federal Register. On August 4, 2023, the final rules were published in the Federal Register with the finalized compliance dates included in the published release. The final rules will become effective on September 5, 2023, with the following compliance dates for the different requirements:
- Companies other than smaller reporting companies will be required to begin complying with the incident disclosure requirements in new Item 1.05 of Form 8-K on December 18, 2023 (and for foreign private issuers, on Form 6-K as one of the disclosable events if disclosed or publicized in a foreign jurisdiction, to any stock exchange or to security holders).
- Smaller reporting companies will have an additional 180 days and will be required to begin complying with Item 1.05 on June 15, 2024.
- All companies will be required to comply with the annual disclosure requirements in new Item 106 of Regulation S-K and new Item 16K of Form 20-F beginning with annual reports for fiscal years ending on or after December 15, 2023 – therefore, for companies with calendar year fiscal years, the first annual report requiring compliance with Item 106 or Item 16K will be the 2023 Form 10-K or Form 20-F filed in 2024, as applicable.
- With respect to compliance with the Inline XBRL requirements, companies generally will have an additional year after the initial compliance date for the related disclosure requirement. Therefore, for Item 1.05 of Form 8-K (and incidents reported on Form 6-K), all companies must begin tagging the required disclosures in Inline XBRL beginning on December 18, 2024, while compliance with the tagging requirements for Item 106 of Regulation S-K and Item 16K of Form 20-F will begin with annual reports for fiscal years ending on or after December 15, 2024.
SEC chair speaks on artificial intelligence
On July 17, 2023, SEC Chair Gary Gensler spoke before the National Press Club on generative artificial intelligence (AI), stating that he believes AI is “the most transformative technology of our time, on par with the internet and mass production of automobiles.” Gensler then discussed the advances in math, data and computational power – and how they underlie the recent growth in generative AI – before turning to the opportunities and challenges AI poses.
Gensler first described, on a micro level, AI’s ability to communicate on an individual basis and asserted that this could pose challenges – such as biases, conflicts of interest and deception – after which he described two specific macro, systemwide challenges he believes AI could eventually pose. He explained that if one or a small number of tech platforms ultimately come to dominate the field of generative AI, the SEC may focus on:
- Privacy, intellectual property and rent extractions: In focusing on who owns the collective data that is helping train the parameters of AI models, Gensler noted that “[f]or the SEC, the challenge here is to promote competitive, efficient markets in the face of what could be dominant base layers at the center of the capital markets. I believe we closely have to assess this so that we can continue to promote competition, transparency, and fair access to markets.”
- Financial stability: In focusing on the need to update current models of risk management guidance due to “[t]he possibility of one or even a small number of AI platforms dominating, rais[ing] issues with regard to financial stability,” Gensler noted that “AI may heighten financial fragility as it could promote herding with individual actors making similar decisions because they are getting the same signal from a base model or data aggregator,” potentially “exacerbat[ing] the inherent network interconnectedness of the global financial system.”
In his concluding remarks, Gensler noted that “[s]ecurities laws … may be implicated depending upon how AI technology is used,” and that within the SEC’s current authorities, it is “focused on protecting against both the micro and macro challenges that [have been] discussed.” Whether – and within what time frame – any securities law changes for AI will be proposed remains to be seen, though the speech indicates this is now an area the SEC is looking into. For a more detailed summary of Gensler’s remarks, refer to our July 19 Cooley PubCo blog post.
Delaware implements DGCL amendments
As discussed in our May One-Minute Reads, certain amendments to the Delaware General Corporation Law (DGCL) were proposed for ratification by the Delaware House of Representatives. The amendments have now been ratified and signed into law by Delaware’s governor, with the amendments taking effect on August 1, 2023.
Most notably for public companies, the amendments revise Section 242 of the DGCL to “(i) eliminate the need to obtain the default vote of stockholders for charter amendments effecting specified types of forward stock splits and associated increases in the authorized number of shares, and (ii) reduce the minimum stockholder vote required to authorize a charter amendment increasing or decreasing the authorized shares of a class, or effecting a reverse split of the shares of a class, in circumstances where the shares of such class are listed on a national securities exchange immediately before the amendment becomes effective and meet the listing requirements of such exchange after the amendment becomes effective.” (For more information, refer to this memo from Richards, Layton & Finger).
Because these amendments lower the required vote threshold for the specified charter amendments from the current threshold, the amendments are particularly helpful for companies with large retail shareholder bases that have faced difficulty securing various required stockholder votes.
Among other changes, the amendments also:
- Confirm that a corporation is not required to receive the statutory minimum consideration (typically the par value) for a disposition of treasury shares.
- Simplify the requirements for the filing of certificates of validation in connection with the ratification of certain defective corporate acts.
- Provide greater certainty regarding the stockholders who must be given a notice of a nonunanimous action by consent of stockholders.
- Reduce the vote required to consummate a domestication, transfer or continuance of a Delaware corporation to a non-US entity.
- Revise the provisions governing statutory appraisal rights, including to add such rights in connection with a transfer, continuance or domestication of a Delaware corporation to a non-US entity.
- Provide that no vote of stockholders is required to authorize a sale, lease, or exchange of collateral securing a mortgage or pledge under specified circumstances.
IRS releases guidance on stock buyback tax
On July 11, 2023, our Cooley tax team published an alert discussing recent IRS transitional guidance on the 1% excise tax on certain repurchases of stock of publicly traded US corporations that was introduced in the Inflation Reduction Act. Importantly, while the tax applies to repurchases occurring in taxable years after December 31, 2022, the guidance states that taxes owed will not be reportable or payable until after the Treasury Department and the IRS issue forthcoming regulations.
Per the guidance, the regulations are expected to provide that “(i) the stock repurchase excise tax will be reported once per taxable year on the Form 720, Quarterly Federal Excise Tax Return, that is due for the first full quarter after the close of the taxpayer’s taxable year, (ii) the deadline for payment of the stock repurchase excise tax will be the same as the filing deadline, and (iii) no extensions will be permitted for reporting or paying the stock repurchase excise tax.” The regulations also are expected to require companies to keep complete and detailed records to establish the amount of stock repurchases, which companies already should be doing.
Nasdaq proposes listing rule regarding reverse stock splits
On July 28, 2023, Nasdaq filed a proposed rule change with the SEC to establish listing standards related to notification and disclosure of reverse stock splits. Nasdaq noted in the filing an increase in reverse stock split activity over the past few years and stated that it believes the proposed listing rules would enhance the ability for market participants to process these events.
Under current listing rules, a reverse stock split qualifies as a “Substitution Listing Event,” which requires notification to Nasdaq no later than 15 calendar days prior to implementation of the event. The proposed rules would delete a reference to a reverse stock split as a “Substitution Listing Event” and instead require a company conducting a reverse split to notify Nasdaq about specific details of the reverse split by submitting a complete Company Event Notification Form at least five business days prior to the anticipated market effective date.
In addition, under the current rules, companies disclose reverse stock splits under the requirement to make “prompt disclosure” of material information that could “reasonably be expected to affect the value of its securities or influence investors’ decisions,” but there is no express requirement for public disclosure specific to reverse splits. The proposed rules also would require public disclosure about the reverse stock split in a Regulation FD-compliant manner at least two business days prior to the anticipated market effective date. Additional provisions also would require timely notice to Nasdaq’s MarketWatch department. For more information, refer to our August 1 Cooley PubCo blog post.
FASB proposes more disclosure on expenses
On July 31, 2023, the Financial Accounting Standards Board (FASB) announced the publication of a proposed Accounting Standards Update (ASU) aimed at providing investors with more information regarding a public company’s expenses. Per the press release, “the proposed ASU would require public companies to provide detailed disclosure of specified categories underlying certain expense captions in interim and annual periods. It would provide investors with more detailed information about the types of expenses, including employee compensation, depreciation, amortization, and costs incurred related to inventory and manufacturing activities in income statement expense captions such as cost of sales; selling, general and administrative; and research and development.”
Comments on the proposal are due by October 30, 2023. For more information on the proposed ASU, together with a discussion of the recent tentative decision by the FASB to move forward with new requirements for enhanced disclosure about segment expenses and other segment items, refer to our August 3 Cooley PubCo blog post.
EU adopts mandatory sustainability reporting standards
Previous Cooley client alerts have discussed the European Union’s adoption of the Corporate Sustainability Reporting Directive (CSRD), which requires EU and non-EU companies with activities in the EU to file annual sustainability reports alongside their financial statements. As explained in our August 11 client alert, the European Commission adopted the first set of European Sustainability Reporting Standards (ESRS), which dictate how EU sustainability reports required by the CSRD should be prepared. The alert notes that the ESRS soon will become law and will apply directly in all 27 EU member states, but not in the UK, and that companies will need to report in compliance with these detailed new ESRS as early as the 2024 reporting period. In addition to urging companies within the scope of the CSRD to begin preparing for these reporting requirements, the alert also summarizes the ESRS and highlights the key elements covered businesses should consider as they get ready to report in accordance with these standards.