The TBA Committee on Racial and Ethnic Diversity will host a free webinar on Thursday, July 20 on the life of in-house counsel. Panelists will cover responsibilities of in-house attorneys in government, corporation and educational institution settings. Participants will describe how they manage outside counsel, work-life balance and the forever changing legal landscape. Considerations such as the closeness of clients and expectations of response time will also be discussed. One hour of general CLE credit is available for a $50 processing fee. Register now.

Environmental, social and governance (ESG) matters have been the subject of increasing focus by companies, regulators, investors and other stakeholders alike. One particular entity that has been concentrating on ESG is the Securities and Exchange Commission (SEC). Read on for a brief glimpse at how this federal regulatory entity is currently working to regulate ESG disclosure for public reporting companies. 

This year, the SEC’s Climate and ESG Task Force recently settled its first case regarding a company’s ESG-related disclosures and alleged misrepresentations, resulting in a settlement of almost $56 million dollars. This signals a major shift in enforcement actions regarding ESG-related disclosure, which has often brought about concerns by the investment community of greenwashing and questions about factual accuracy.

Additionally, there are several sets of rules the SEC has been busy working on with respect to ESG disclosure. 

1. Climate Change Disclosure Rules

In over 500 pages, the SEC introduced proposed climate change disclosure rules last year and generated a record number of responses during its comment period, indicating the level of controversy surrounding the extent of the proposed rules. If passed as proposed, many SEC reporting companies would be subject to extensive climate-related disclosure, including but not limited to reporting on greenhouse gas (GhG) emissions, management and board oversight and experience, and financial disclosures regarding climate-related matters. Initially set to be finalized last year, the proposed rules were scheduled to be passed in April of this year and just this month, the SEC indicated in its most recently released SEC Reg Flex Agenda, the rules could be finalized in October of this year. Once passed, the rules would become effective as of a specified date, and companies would have a transition period for implementing the required disclosure. 

As indicated previously by the staff, the proposed climate-related disclosure framework was modeled partially on the Task Force on Climate-related Financial Disclosure’s (TCFD) recommendations and draws upon the Greenhouse Gas (GHG) Protocol. The proposed rules, seemingly unprecedented in nature, are significantly more prescriptive rather than “principles-based” disclosure rooted in materiality, and intended to provide stakeholders with “consistent and comparable data.” It is anticipated that the final rules may be somewhat less far-reaching than the proposed rules issued last year.

2. Cybersecurity Disclosure Rules

Last year, the SEC also proposed rules and amendments to enhance and standardize public companies’ disclosures regarding cybersecurity risk management, strategy, governance and incident reporting. Less controversial than the proposed climate change disclosure rules, the proposed cybersecurity rules would amend current, quarterly and annual reporting requirements of public companies to provide more detailed disclosure and frequent updates regarding certain cybersecurity incidents, board and management oversight and policies regarding cybersecurity. The proposed cybersecurity rules followed a similar adoption timeline as the proposed climate change disclosure rules, and most recently were slated for finalization in October of this year in the SEC Reg Flex Agenda released earlier this month. 

Although cybersecurity risks and disclosures are nothing new for public company boards of directors, the SEC’s proposal marks a dramatic shift in disclosing such events, especially the Form 8-K notification requirements and duty to disclose cybersecurity expertise and oversight by the board. Given the ever increasing concern regarding cybersecurity and related breaches and damage, an enhancement in disclosure in this regard has been generally well received by certain stakeholders, though public companies should consider how they need to adjust policies and practices to comply with the proposed rules. 

3. Proposed Human Capital Disclosure Rules

The SEC has indicated additional regulation in the area of human capital disclosure, or disclosure regarding personnel-related matters of public companies. While current regulations exist, the SEC is expected to enhance this type of disclosure. The proposed rules are not yet out and the SEC most recently indicated this month in the SEC Reg Flex Agenda that it is targeting issuance of the proposed rules in October of this year (previously expected to be issued in April of this year). Following issuance of proposed rules, there is expected to be a comment period for interested parties to share input on the rules, followed by consideration and possible passage of the final version of these rules by the SEC at some point after that. 

4. Proposed Corporate Board Diversity Rules.

The SEC is considering issuing proposed rule amendments to enhance public company disclosure about the diversity of board members and board nominees. While initially anticipated to be issued in October of this year, the latest SEC Reg Flex Agenda indicates the rules will be proposed in April 2024. We have seen enhanced diversity disclosure requirements of public company board members by certain securities exchanges and it is no surprise that the SEC is considering enhancing disclosure regarding the same.   

Sehrish Siddiqui is a member of the Corporate and Securities Group of Bass, Berry & Sims’ Memphis office, where she counsels a wide variety of public companies primarily in the areas of corporate finance, compliance and governance. She has served as counsel to underwriters, agents and issuers for more than 100 initial public offerings, follow-on offerings and at-the-market programs of various NYSE- and Nasdaq-traded entities. Her national and international clients include healthcare companies, real estate investment trusts, business development companies, retail and consumer product companies and investment banks.

On June 1, the U.S. Supreme Court ruled in a closely watched case, Slack Technologies v. Pirani, that a plaintiff in a legal action brought under Section 11 of the Securities Act of 1933, as amended (1933 Act), must be able to trace their shares purchased to the allegedly false or misleading registration statement that is the subject of the action. Although most circuit courts had also required this kind of tracing, the U.S. Court of Appeals for the Ninth Circuit had upheld the denial of a motion to dismiss the case based on the plaintiff’s failure to allege that he purchased shares traceable to the allegedly misleading registration statement. The court’s opinion, written by Justice Gorsuch, unanimously reversed the Ninth Circuit’s opinion and vacated the resulting judgment.

Section 11 of the 1933 Act allows a person acquiring securities under a registration statement to sue various entities and individuals — including the issuer of the securities — if the registration statement, at the time of effectiveness, “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” The language of the statute ambiguously references “such security,” leaving room for interpretation as to the connection a plaintiff must make between the securities acquired and the registration statement asserted to have been materially inaccurate or incomplete. An issuer’s liability under Section 11 is effectively strict liability. The statute provides defenses to other participants in the registered offering, but not the issuer.

In confirming the tracing requirement, the court reviewed the legal and practical context in which the ambiguous statutory language operates (including substantive differences between the 1933 Act and the Securities Exchange Act of 1934, as amended), finding that “[c]ollectively, these contextual clues persuade us that Slack’s reading of the law is the better one.” Citing to a 1967 opinion written by Judge Friendly for the U.S. Court of Appeals for the Second Circuit, Barnes v. Osofsky, 373 F. 2d 269 (2d Cir. 1967), the court further noted that nothing in its analysis or conclusion was “particularly novel.” The court credited some of the contrary assertions made by the plaintiff but did not find any of them persuasive considering the substantial contextual arguments and decisional law supporting the defendant’s position. In concluding, the court acknowledged that Congress can always change the tracing rule by legislative action and left it to the Ninth Circuit to determine “[w]hether Mr. Pirani’s pleadings can satisfy §11(a) as properly construed.”

This opinion is important to both corporate finance lawyers working on public offerings — in assessing the risks to their clients in proceeding — and to trial and appellate litigators who are retained to vindicate client rights as purchasers of securities sold in public offerings. The complexity of securities trading markets can sometimes make tracing difficult. Unregistered shares may be available for purchase in the market at the same time registered sales are being made. (That was, in fact, the case with respect to the market for the shares of Slack Technologies at the time the plaintiff, Pirani, purchased his shares.) The court’s opinion in Slack Technologies makes it critical for aggrieved purchasers to have at least circumstantial evidence that the shares they purchased were among those registered to get a Section 11 case heard and prevail on their Section 11 claims.

Additional information about the Slack Technologies opinion (and related regulatory and practice considerations) can be found on the Business Law Prof Blog here, here, here, here, and here.

This article was contributed by Joan Heminway. She is the Rick Rose Distinguished Professor of Law and Interim Director of the Institute for Professional Leadership at The University of Tennessee College of Law, a corporate finance lawyer and a past chair of the TBA Business Law Section.

While there was certainly no lack of press coverage around the 2023 Tennessee legislative session, one broad change to Tennessee business laws that successfully avoided the mainstream spotlight involves the modification of Tennessee business entity statutes relating to registered agent requirements.

As a refresher, all business entities with limited liability characteristics that are formed or qualified to do business in Tennessee must continuously maintain a registered office and registered agent within Tennessee.[1] The registered agent generally serves as an entity’s agent for service of process, notice or demand.

Senate Bill No. 1174 (SB1174), which was recently enacted and will go into effect on July 1, proposed streamlining revisions to the various business entity statutes that address required characteristics of registered agents. These amendments serve to both expand the scope of characteristics that can qualify a person or entity to serve as a registered agent in Tennessee and also create consistency across business entity statutes that did not exist prior to these amendments.

A comparison of the pre-amendment registered agent requirements under the Tennessee Business Corporation Act (T.C.A. § 48-15-101(a)(2)) and the Tennessee Revised Limited Liability Company Act (T.C.A. § 48-249-109(a)(2)) highlights the historical inconsistencies across entity statutes that have been remedied through the SB1174 amendments.

Prior to the SB1174 amendments, only (i) an individual residing in Tennessee, (ii) a Tennessee or foreign for-profit corporation or (iii) a Tennessee or foreign nonprofit corporation could serve as a registered agent for a Tennessee for-profit corporation. Under the Tennessee Revised Limited Liability Company Act, however, the scope of qualified registered agents was more expansive, allowing for limited liability companies (Tennessee or foreign) and limited liability partnerships (Tennessee or foreign) to also serve as registered agents (in addition to those permitted under the Tennessee Business Corporation Act). This resulted in an arguably illogical inconsistency between the two entity types.

The SB1174 amendments expand the scope of permissible registered agent entity types across all Tennessee entity statutes to now include (i) an individual residing in Tennessee, (ii) a Tennessee or foreign for-profit corporation, (iii) a Tennessee or foreign nonprofit corporation, (iv) a Tennessee or foreign limited liability company, (v) a Tennessee or foreign general partnership, (vi) a Tennessee or foreign limited partnership and (vii) a Tennessee or foreign registered limited liability partnership.

From a practical perspective, the SB1174 amendments may incentivize more commercial vendors to offer registered agent services to business entities in Tennessee, as the administrative burden of complying with inconsistent registered agent definitions as a registered agent vendor in Tennessee has been eliminated.

Nathan Harris is the immediate past chair of the TBA Business Law Section. His practice covers the entire business lifecycle, from assisting with entity formation and providing guidance on commercial transactions and fundraising to advising buyers and sellers in connection with complex M&A transactions. He has experience representing clients in a wide variety of industries, including technology startups, electronic payments companies, pharmaceutical wholesalers, veterinary practices, community banks and restauranteurs.

More contraband believed to be connected to criminal justice advocate Alex Friedmann — who hid weapons inside the walls of the Downtown Detention Center while it was under construction — was recently discovered in the center, the Tennessean reports. The latest discovery comes more than six months after Friedmann was sentenced to 40 years in prison for felony vandalism in connection to the weapons. Employees found the additional items in a mechanical room in a non-secure area of the jail. The packages, found in the room’s ductwork, included a uniform, $100 cash and a pair of black shoes, one of which had a handcuff key hidden in the sole.

The Tennessee Innocence Project will open a new office in Memphis in September, the Daily Memphian reports. The nonprofit organization, headquartered in Nashville, also has hired two new employees to assist with Memphis cases. Gordon Pera will serve as a staff attorney of the new office while Katie Hagan will serve as senior legal counsel. Pera, a former Shelby County public defender, previously represented indigent clients. Hagan, a Nashville native, has practiced criminal law for 20 years. Previously, she worked at the Nashville District Attorney’s Office and was a partner at Hagan & Todd Law Offices. She will be based in Nashville. Tennessee Innocence Project executive director and lead counsel Jessica Van Dyke said the organization is thrilled to bring its mission to Memphis and “fight for justice and exoneration alongside the Memphis community.”

Montgomery County lawyer Hugh Reid Poland III was censured on June 23 by the Tennessee Supreme Court. Poland represented a client who settled a custody dispute at mediation. The settlement required the client to create a parenting and visitation arrangement for a trial period, and Poland to draft the required agreed order, parenting plan and child support worksheet. The court found that Poland failed to respond to communications from opposing counsel regarding the documents and ultimately failed to draft the documents. Poland also made misrepresentations to his client and ultimately stopped responding to the client’s requests for information. Opposing counsel ended up drafting the required documents but included inaccurate statements about Poland’s client. Poland approved the documents without notifying or obtaining approval from the client. The court found that these actions violated Rules of Professional Conduct 1.3, 1.4, 8.4(c) and 8.4(d).

Stephanie Williams has announced she is a Democratic candidate for Davidson County Circuit Court. She is running in a special primary election set for March 5, 2024, to replace Judge Philip E. Smith, who died in 2022. Williams has 20 years experience as a family law attorney. Her career began in the Law Office of Richard Manson. From there, she founded the Family Justice Center and represented hundreds of litigants at reduced rates. Most recently she served nine years as the special master of the court under Smith. Williams is one of three candidates vying for the Democratic nomination. In January, Gov. Bill Lee appointed Stanley Kweller to fill the seat until the general election on Aug. 1, 2024.

It was not long ago that North Carolina had the highest personal and corporate income tax rates in the Southeastern United States, but state legislators have been systematically cutting business and individual taxes, Forbes reports. This year, legislators turned their attention to the professional privilege tax, with the state House passing a budget that repeals the tax. The final budget is being negotiated but if the tax is repealed in the Tar Heel state, Tennessee would be among just five states that still levy a privilege tax. Tennessee House Majority Leader William Lamberth tells Forbes that state leaders agree with the goal of completely doing away with the tax but are moving judiciously. "It should never have been put in to begin with and on every single profession," he said. Jim Brown, NFIB state director in Tennessee, tells the magazine that “No one should be taxed just to go to work” and that “Paying the state $400 a year is a burden on many and frankly an insult” for those who “take care of the needs of so many Tennesseans.”

For the week of June 19, 2023 - June 23, 2023