Weinberg & Company

Best Practice APRIL 2022 Newsletter

Court Strikes Down California Board Diversity Law –

A California Superior Court Judge has ruled unconstitutional a 2020 law that requires publicly traded companies in California to fill Board of Director seats with a quota based on race, ethnicity or sexual preference.

In his April 1, 2022 ruling Judge Terry Green said that AB 979 (California Corporations Code § 301.4) violated the California Constitution’s Equal Protection Clause.

Passed in 2020, the law required foreign and domestic companies with principal offices in California to name at least one board member by the end of 2021 who identified as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, or one who identifies as LGBTQ+.

It also required that, by the end of 2022, publicly traded companies with more than four, but fewer than nine directors, have a minimum of two directors from those underrepresented communities. Publicly traded companies with nine or more directors were required to have a minimum of three directors from those communities. Companies that fail to comply would face fines of $100,000 for the first violation, and $300,000 for later violations.

AB 979 followed the enactment of a 2018 California law that mandated gender diversity on the boards of California publicly traded companies.

The law’s constitutionality was challenged by Judicial Watch in the lawsuit Robin Crest, et al, v Alex Padilla. While the court agreed that there is a compelling interest in eliminating discrimination, it found that California failed to produce evidence of past discrimination in the selection of corporate board directors.

In his summary ruling Judge Green also said:

Because Section 301.4 treats similarly-situated individuals differently based on race, sexual orientation, and gender identity, because that use of suspect categories is not justified by any compelling interest, and because the statute is not narrowly tailored to serve the interests offered, Section 301.4 violates the Equal Protection Clause of the California Constitution.

Though an appeal may be likely, the court’s ruling also bars California from spending any money to enforce the law.

Since its enactment, companies have moved quickly to create diverse boards. In March, the California Secretary of State issued a report showing that 42% of the state’s 716 publicly traded companies with a principal executive office in California were complying with the law’s requirements.

Whether this court action changes how California public companies approach board diversity going forward is still unclear. Beginning this year Nasdaq-listed companies must follow listing rules requiring adherence to specific diversity quotas using the Board Diversity Matrix template, or a format substantially similar.

The Nasdaq diversity rules were the result of a Nasdaq initiated proposal that received SEC approval in August 2021. The SEC is facing a lawsuit filed by the Alliance for Fair Board Recruitment that alleges that the Commission exceeded its authority in approving the Nasdaq rule. At least 17 states are backing that challenge.

SPACs: New Disclosures Proposed

The SEC has proposed new rules that would increase disclosure requirements in initial public offerings involving special purpose acquisition companies (“SPACs”) and in business combination transactions involving SPACs and private operating companies.

If adopted, the new rules would:

·    Require additional disclosure about compensation paid to SPAC sponsors, conflicts of interest and dilution.

·    Require disclosure regarding business combination transactions between SPACs and private operating companies, and the fairness of those combinations.

·    Address issues relating to projections made by SPACs and their target companies, including the Private Securities Litigation Reform Act safe harbor for forward-looking statements and the use of projections in Commission filings and in business combination transactions.

·    Require that the financial statements of the private companies targeted by SPACs become more in line with the financial statements required in registration statements for an initial public offering.

In addition, the proposal also includes a new rule addressing the status of SPACs under the Investment Company Act of 1940. Under the proposed rule, SPACs that satisfy certain conditions that limit their duration, asset composition, business purpose, and activities may not be required to register under the Investment Company Act.

The Commission has opened a 60-day comment period for the proposed rules following publication on the SEC’s website, or 30 days following its publication in the Federal Register.

Biden Nominates 2 to SEC Commission

President Biden has nominated Democrat Jaime Lizarraga and Republican Mark Uyeda to serve as SEC Commissioners.

If confirmed by the Senate, Uyeda would fill the seat formerly held by Commissioner Elad Roisman, who resigned in January (his 5-year term was set to expire in 2023). Lizarraga would fill the seat of Commissioner Allison Herren Lee, whose term expires in June 2022.

Lizarraga currently is Senior Advisor to House Speaker Pelosi. Uyeda, a career attorney with the SEC, is currently detailed to work with the US Senate Committee on Banking, Housing and Urban Affairs, where he is Securities Counsel on the Committee’s Republican staff.

The nominations would fill the SEC’s five Commission seats, which currently consist of Democrats Gary Gensler (Chair), Caroline Crenshaw and outgoing member Allison Herren Lee, and Republican Hester Peirce. Under SEC rules, no more than three commissioners can be affiliated with one party. Following both appointments, Democrats will keep their majority, with a 3-2 edge.

Class Actions, Restatements Plunge 

Reversing a 3-year trend, the number of securities class actions lawsuits involving accounting allegations dropped in 2021, as did the monetary values of the settlements. Filings related to financial statement restatements also declined to the lowest level in 10 years.

Cornerstone Research reported that 46 securities class actions filings related to accounting allegations were filed in 2021, down from 70 that were filed in 2020, and 67 that were filed in 2019. The 2021 filings were “well below the historical average of 61, and the second-lowest level in the last 10 years.”

Cornerstone reported that:

·    There were 33 accounting case settlements in 2021, down from 38 settlements in 2020. During the 2012-2020 time period, an average of 43 settlements occurred annually.

·    Total value of all accounting case settlements dropped to $755 million in 2021, down from $3.7 billion in 2020.

·    Contributing to the decline in total settlement value, there was only one accounting case mega settlement that was greater than $100 million.

·    Though the monetary value of the settlements decreased in 2021, the defendant issuers were larger in both market capitalizations and total assets.

·    Allegations related to improper revenue recognition were included in 41% of 2021 accounting case filings, compared to 37% in 2020 and 19% in 2019.

·    One area that did see an uptick in accounting-related case filings was SPACs, which represented approximately 20% of accounting case filings in 2021.

Selling Grandma’s Old Dishes Disclosed!

If you’re making more than $600 per year selling goods or services through any of the online platforms such as e-Bay, Airbnb, Venmo, and Uber, the IRS now will know about it.

Beginning with reporting year 2022, online platforms that transfer funds between buyers and sellers are required to send form 1099-K to the IRS when transactions reach the $600 threshold. It doesn’t matter if you’re making a little cash finding a new home for Grandma’s old dishes, renting out that extra room on weekends, or if you’re a gig worker making a little extra on the side. The tax collector wants in.

Under prior law, the online platforms were required to issue 1099-Ks if a seller earned more than $20,000 per year and had more than 200 transactions. Last year, however, eager to boost tax revenue by catching unreported income, Congress lowered the 1099-K threshold as part of the American Rescue Plan Act.

The new law is raising concern among some members of Congress who are questioning what affect the $600 reporting threshold will have on e-commerce.

Last year, Congresswoman Carol Miller (R-WV) introduced the Saving Gig Economy Taxpayers Act which would reinstate the $20,000 per year and 200 transaction threshold. Almost a year later, the bill is still pending.