Yearly Archives: 2024

SEC Targets AI Washing in Private Capital Markets

Posted by Charu A. Chandrasekhar, Kristin A. Snyder, and Matt Kelly, Debevoise & Plimpton LLP, on
Wednesday, June 26, 2024
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Charu Chandrasekhar and Kristin A. Snyder are Partners and Matt Kelly is a Counsel at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Ms. Chandrasekhar, Ms. Snyder, Mr. Kelly, Andrew J. Ceresney, Avi Gesser, and Suchita Mandavilli Brundage.

On June 11, 2024, the U.S. Securities and Exchange Commission (“SEC”) filed its third matter this year involving “AI washing”—namely, alleged misstatements or omissions by securities market participants about the use of artificial intelligence (“AI”). This particular case is noteworthy for several reasons: it is the Commission’s first litigated AI washing matter; concerns statements made to raise funds from private market investors; and involves parallel criminal charges.

The SEC’s complaint alleges that Ilit Raz, the founder and Chief Executive Officer of tech startup Joonko Diversity, Inc. (“Joonko”), marketed Joonko as capable of helping clients find job candidates from diverse backgrounds, but that she defrauded investors by making material misrepresentations regarding Joonko’s customer base, business operations, revenue and use of AI. Raz allegedly made claims about Joonko’s use of “AI-based technology,” a “proprietary algorithm” and “machine learning,” none of which actually existed. The majority of the alleged misrepresentations about Joonko’s technology platform were made in presentations and marketing materials provided to private equity and venture capital firms, as well as to individuals, for the purpose of raising private capital.

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ESG Engagements in 2024

Posted by Rebecca Sherratt, Miles Rogerson, and Will Arnot, Diligent Market Intelligence, on
Tuesday, June 25, 2024
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Rebecca Sherratt is a Publications Editor, Miles Rogerson is a Financial Journalist, and Will Arnot is a Senior Editorial Specialist at Diligent Market Intelligence (DMI). This post is based on a Diligent memorandum by Ms. Sherratt, Mr. Rogerson, Mr. Arnot, and Kira Ciccarelli.

Executive Summary

Key trends to emerge from ESG engagements in 2023 and Q1 2024.

  1. As global regulators look to increase corporate ESG accountability, an increasing number of companies are identifying climate change as a risk in their corporate disclosures. In 2023, 76.2% of the 3,000 largest U.S. companies mentioned climate change as a risk in their 10-K reporting, up from 68.2% a year prior.
  2. Scope 3 emissions, derived from a company’s value chain, are becoming a standard part of U.S. corporate sustainability disclosures. Of the 500 largest U.S. companies, 98.6% voluntarily disclosed Scope 3 emissions in 2022 and/or 2023, while 65.7% of the 3,000 largest U.S. companies also provided such disclosure.
  3. As climate-related disclosure requirements make their way into statute, a new frontier is rapidly emerging as investors drive nature-related issues up the agenda. The 10 biodiversity proposals subject to a vote at S&P 500 constituents averaged 24% support in 2023, compared to 65 climate change proposals securing 21% support.
  4. 2024 investor policy changes placed an emphasis on director accountability and greater climate-related disclosure. Companies falling short of new minimum requirements could find their directors at risk of opposition, with shareholders looking to encourage individual accountability for ESG oversight.
  5. In Q1 2024, 181 campaigns were launched at U.S.-based companies inclusive of social demands, more than double the 71 environmental campaigns launched in the same period and on track to exceed the 234 social campaigns launched throughout 2023. Labor unions are driving discussions concerning workers’ rights, with seven social campaigns launched globally involving labor unions in Q1 2024, the same number as in the entirety of 2023.

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The Social Benefits of Control

Posted by Emilie Aguirre and Gabriela Nagle Alverio (Duke University), on
Tuesday, June 25, 2024
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Emilie Aguirre is an Associate Professor of Law and Gabriela Nagle Alverio is a Research Assistant at Duke University School of Law. This post is based on their article, forthcoming in the Duke Law Journal.

Multiclass share structures have exploded in popularity over the past twenty years since Google went public with one in 2004. This uptick has occurred despite profound concerns over the threats such structures can pose to good governance. Multiclass structures create uneven shareholder voting rights, granting insiders voting power that exceeds their economic stake in the firm. As a result, insiders generally maintain firm control while still getting to raise money on public markets.

Because multiclass structures insulate insiders from voting accountability, they increase the risk of self-dealing at the expense of outside shareholders. This self-dealing may be monetary—allowing insiders to amass personal fortunes—or it may be idiosyncratic—allowing them to gain power, control political agendas, or simply pursue pathways they personally value. For example, Mark Zuckerberg may keep his controlling stake in Meta not just to get rich, but also to pursue his personal vision for the company, gain power, shape political agendas on privacy and artificial intelligence, or any other number of personal reasons. The discourse around multiclass structures has focused largely on whether these arrangements, which allow insiders to extract private benefits of control, represent the value-enhancing products of private bargaining, or anti-democratic threats to shareholder value.

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The Chamber and NCPPR file brief challenging SEC climate disclosure rule

Posted by Cydney Posner, Cooley LLP, on
Tuesday, June 25, 2024
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Cydney Posner is Special Counsel at Cooley LLP. This post is based on her Cooley memorandum.

As you probably recall, in March 6, the SEC adopted final rules “to enhance and standardize climate-related disclosures by public companies and in public offerings.” (See this PubCo post, this PubCo post, this PubCo post, and this PubCo post.) Even though, in the final rules, the SEC scaled back significantly on the proposal—including putting the kibosh on the controversial mandate for Scope 3 GHG emissions reporting and requiring disclosure of Scope 1 and/or Scope 2 GHG emissions on a phased-in basis only by accelerated and large accelerated filers and only when those emissions are material—all kinds of litigation immediately ensued. Those cases were then consolidated in the Eighth Circuit (see this PubCo post) and, in April, the SEC determined to exercise its discretion to stay the final climate disclosure rules “pending the completion of judicial review of the consolidated Eighth Circuit petitions.” There are currently nine consolidated cases—with two petitioners, the Sierra Club and the Natural Resources Defense Council, having voluntarily exited the litigation (see this PubCo post), and a new petition having just been filed by the National Center for Public Policy Research, a familiar presence in various cases, such as the legal challenges to the Nasdaq board diversity rules (see this PubCo post), state and corporate DEI initiatives (see this PubCo post  and this PubCo post), and litigation over shareholder proposals (see this PubCo post). Petitioners have recently begun to submit briefing.  One that has been made available is the brief that was filed on behalf of the U.S. Chamber of Commerce, Texas Association of Business, Longview Chamber of Commerce and the National Center for Public Policy Research.

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Climate Disclosure Update

Posted by Michael R. Littenberg and Marc Rotter, Ropes & Gray LLP, on
Monday, June 24, 2024
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Michael Littenberg is a Partner and Global Head of ESG, CSR and Business and Human Rights Practice, and Marc Rotter is Counsel at Ropes & Gray LLP.

Pencils down on climate disclosure compliance? Not so fast.

It is uncertain when or if the SEC’s new climate disclosure rules will come into effect. The ultimate fate of the rules is unclear given the litigation over the rules in the Eighth Circuit. In addition, the SEC recently stayed the rules pending resolution of the litigation. However, as we have said before, “it’s not pencils down on climate disclosure more generally.” Public and private companies need to manage to other current and pending climate disclosure requirements (and other ESG disclosures more generally) at the U.S. federal and state levels as well as outside the United States. As discussed in this piece, even though the SEC’s new climate disclosure rules are on hold and may be scaled back or never implemented, there are other climate disclosure requirements to take into account.

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Beyond Risk: Voluntary Disclosure Under Ambiguity

Posted by Ariel Rava (Harvard Law School), on
Monday, June 24, 2024
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Ariel Rava is a Post-Doctoral Fellow at Harvard Law School’s Program on Corporate Governance. This post is based on his recent article.

Ambiguity, also known as Knightian uncertainty, is rooted in nearly every real-life decision process. It refers to situations in which both the outcome and the probabilities governing the set of possible outcomes are unknown. Risk, on the other hand, refers to situations where the future outcome is unknown, but the set of possible outcomes is known, with certain probabilities attached to them. To illustrate, if I toss a coin, I know that it will land with heads or tails, but I do not know which side it will land on until after the toss. If I know the probabilities are 0.5 and 0.5, then I face risk. If I do not know what the probability of heads or tails is (the coin may be fair or unfair), then I face ambiguity. Thus, the key distinction between risk and ambiguity is whether the probability distributions associated with the possible outcomes are known or unknown.

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Should Universities Take a Stand on Public Issues? How Effectively Are Universities Governed?

Posted by John C. Wilcox, on
Monday, June 24, 2024
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John C. Wilcox is Chairman Emeritus at Morrow Sodali. This post is based on his recent talk at Harvard’s 60th Reunion.

Harvard and many of our most respected universities are going through a period of unprecedented turmoil. In a recent Harvard Magazine article entitled “Why Americans Love to Hate Harvard,” former Harvard President Derek Bok described the “rising tide of antagonism to higher education.”

Why is this happening? Public hostility and mistrust of higher education undoubtedly reflects escalating social and political divisions within the U.S., but some of the fault rests within the universities themselves.

President Bok recommends an improved focus on “civil education” and a more balanced curriculum representing conservative as well as progressive ideas. I believe that in addition to teaching reforms and campus culture, Harvard and other universities need to address problems of ineffective governance, opaque decision-making and poor communication.

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Delaware Court Denies Dismissal of Claims Based on Controller and Financial Advisor Conflicts

Posted by Edward B. Micheletti, Joseph O. Larkin, and Arthur R. Bookout, Skadden, Arps, Slate, Meagher & Flom LLP, on
Sunday, June 23, 2024
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Edward B. Micheletti, Joseph O. Larkin, and Arthur R. Bookout are Partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Micheletti, Mr. Larkin, Mr. Bookout, and Gregory P. Ranzini and is part of the Delaware law series; links to other posts in the series are available here.

On May 31, 2024, the Delaware Court of Chancery issued an important decision addressing several key areas of Delaware law related to merger litigation. The opinion indicates that the court will continue to closely scrutinize potential conflicts of interest in M&A transactions involving controlling stockholders and financial advisors, particularly as to disclosures concerning their fees and relationships.

Background

In Firefighters’ Pension System of the City of Kansas City, Missouri Trust v. Foundation Building Materials, Inc., Vice Chancellor Travis Laster granted in part and denied in part six separate motions to dismiss arising from the sale of Foundation Building Materials (the Company) to a subsidiary of American Securities LLC (American).

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Court calls a halt to Exxon case against Arjuna

Posted by Cydney Posner, Cooley LLP, on
Saturday, June 22, 2024
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Cydney Posner is Special Counsel at Cooley LLP. This post is based on her Cooley memorandum.

In January, ExxonMobil filed a lawsuit against Arjuna Capital, LLC and Follow This, the two proponents of a climate-related shareholder proposal submitted to Exxon, seeking a declaratory judgment that it may exclude their proposal from its 2024 annual meeting proxy statement. Then, the two proponents notified Exxon that they had withdrawn their proposal and promised not to refile; therefore, they said, the case was moot. But Exxon refused to withdraw its complaint because it believed that there was still a critical live controversy for the Court to resolve.  And the Federal District Court for the Northern District of Texas agreed—at least as to Arjuna.  While the Court dismissed the case against Follow This, an association organized in the Netherlands, for lack of personal jurisdiction, it allowed the case against Arjuna to proceed on the basis of both subject matter and personal jurisdiction, citing precedent that “a defendant’s voluntary cessation of a challenged practice does not deprive a federal court of its power to determine the legality of the practice.” (For background on this case, see this PubCo post.) According to the Court, the “voluntary-cessation doctrine requires more than platitudes to render a case moot;…to moot Exxon’s claim, Defendants must show that it is ‘absolutely clear’ the relevant conduct ‘could not reasonably be expected to recur.’” But the argument continued, even after the decision was rendered, as Arjuna continued to submit letters to Exxon in which Arjuna “unconditionally and irrevocably covenant[ed] to refrain henceforth from submitting any proposal for consideration by Exxon shareholders relating to GHG or climate change,” and Exxon continued to contend that the letters were not enough.  (See this PubCo post.)  Finally, yesterday, after a hearing on the matter, the Court called a halt, issuing an Order that Exxon’s claim was moot and dismissing the action without prejudice. But not before the Court got in a few digs at Arjuna, activism and even at the SEC.

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Vice Capital

Posted by Andrew Jennings (Emory University) and Kimberly D. Krawiec (University of Virginia), on
Friday, June 21, 2024
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Andrew Jennings is an Associate Professor of Law at Emory University School of Law and Kimberly D. Krawiec is the Charles O. Gregory Professor of Law and Sullivan and Cromwell Professor of Law at the University of Virginia School of Law. This post is based on their article, forthcoming in the U.C. Irvine Law Review.

The ESG movement has spurred consideration of how investors express positive values in their startup investment decisions. Less examined is the mirror phenomenon—how startups in stigmatized industries access capital. In a move to fill that gap, in our forthcoming article, Vice Capital, we conduct an interview-based study, supplemented with descriptive data, on the funding of “vice” startups. Vice businesses are, to varying degrees, stigmatized, prohibited, or heavily regulated, with restrictions designed to protect the safety, well-being, and even morality of customers and third parties. These industries have traditionally been understood to include the adult, alcohol, tobacco, weapons, and gambling industries, among others.

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