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Business Law Today

April 2022

April 2022 in Brief: Securities Law

Alan J Wilson and Rani Doyle

April 2022 in Brief: Securities Law

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Securities Regulation

PCAOB Disciplines Big Four Partner for Failure to Supervise

By Thomas W. White, Retired Partner, WilmerHale

In its first major enforcement action since the appointment of new Chair Erica Y. Williams, the Public Company Accounting Oversight Board (“PCAOB”) sanctioned Scott Marcello, former Vice Chair of Audit of the Big Four accounting firm KPMG LLP, for failure reasonably to supervise senior members of KPMG’s audit practice. The matter arose from a major scandal in which KPMG personnel, seeking to improve the firm’s results in PCAOB inspections, obtained confidential PCAOB information regarding audits that the PCAOB would select for review during its 2016 and 2017 inspections of KPMG, and used the information to enhance the audit documentation for the selected 2016 audits. (KPMG paid an SEC fine of $50 million for this and other violations, and six individuals were criminally charged and/or sanctioned by the SEC.)

In a settled disciplinary order, the PCAOB found that Marcello was a “supervisory person” of KPMG by virtue of his position as head of KPMG’s audit practice and responsibility for implementation and monitoring of KPMG’s audit-related quality control policies and procedures. He had supervisory responsibility over subordinates, including KPMG’s national head of Professional Practice, who participated in the scheme to obtain and use PCAOB inspection information. Marcello became aware in 2016 and 2017 from his subordinates that they had obtained information about audits selected by the PCAOB for inspection and planned to use the information to enhance documentation for those audits. He failed to take appropriate action in 2016 and only reported the receipt of confidential information in 2017 after learning of others’ negative reaction to KPMG’s having the information. The PCAOB found that Marcello had violated the supervision provisions of the Sarbanes-Oxley Act. It censured him and fined him $100,000.

The Marcello order represents the first “failure to supervise” case brought by the PCAOB and the highest fine it has imposed against an individual in a settled case. As Chair Williams noted, the order “demonstrates that the PCAOB is committed to sanctioning top-level personnel at the largest firms when they fail to take sufficient supervisory steps aimed at preventing violations by their subordinates.”

US Securities and Exchange Commission Division of Examinations 2022 Exam Priorities

By Peter M. McCamman, Leslie S. Cruz, Adam D. Kanter, Stephanie M. Monaco, Anna T. Pinedo, Steffen Hemmerich, Stephen Vogt, & Wonji L. Kim, Mayer Brown LLP

On March 30, 2022, the Division of Examinations of the US Securities and Exchange Commission (“SEC”) announced its examination priorities for 2022. This year’s priorities specifically focus on: (i) private funds; (ii) environmental, social and governance investing; (iii) standards of conduct, including Regulation Best Interest, fiduciary duty, and Form CRS; (iv) information security and operational resiliency; and (v) emerging technologies and crypto-assets. Mayer Brown’s Legal Update briefly summarizes these “Significant Focus Areas,” highlights issues from the Investment Adviser and Investment Company Examination Program and the Broker-Dealer and Exchange Examination Program, and discusses other selected topics for 2022.

SEC Proposes Enhanced Disclosures and Investor Protections for SPACs

By Melissa Sanders, Fox Rothschild LLP

On March 30, 2022, the SEC proposed new rules and amendments to address concerns related to the increase of public offerings in recent years by special purpose acquisition companies (“SPACs”). Chair Gary Gensler noted that the structure used by SPACs is “an alternative means to conduct an IPO” and that investors should be given the same protections they would receive in a traditional IPO. Disclosure is a key area of focus in the proposals, which would require disclosures regarding conflicts of interest, dilution, and SPAC sponsors. Financial statements of a private operating company entering a business combination transaction with a SPAC would need to meet similar requirements to those required in a traditional IPO. The rules would also amend the definition of “blank check company” in order to preclude SPACs from relying on the safe harbor exceptions for certain forward-looking statements, and would set out conditions with which a SPAC may comply to ensure that the SPAC would not be categorized as an investment company under the Investment Company Act.

The Delaware Chancery Court Rules in Favor of Elon Musk on Tesla’s 2016 Acquisition of SolarCity, Noting Important Governance Practices

By Rani Doyle

In an engaging and informative opinion dated April 27, 2022, Vice Chancellor Joseph R. Slights III of the Delaware Chancery Court issued a verdict in favor of Elon Musk, defendant, in a derivative lawsuit brought by several stockholders of Tesla Motors Inc., plaintiffs, relating to Tesla’s 2016 acquisition of SolarCity Corporation. The 131-page opinion is quick reading: therefore, this note consists primarily of salient excerpts from the decision, indented below, together with a summary of certain relevant points and a conclusion:

The parties’ dispute begins, unsurprisingly, with the “gating question” of what standard of review is implicated by Plaintiffs’ showcase claims of breach of fiduciary duty. Again unsurprisingly, Plaintiffs argue the Court should review the fiduciary duty claims under the entire fairness standard, and they proffer the means by which entire fairness is triggered here—namely, that a majority of the Tesla Board was conflicted with respect to the Acquisition and that Elon is a conflicted controlling stockholder. Predictably, Elon counters that the business judgment rule is the correct answer to the standard of review question because he is not a controlling stockholder, a majority of the Tesla Board was not conflicted and, even if it was, the fully informed, uncoerced vote of Tesla’s stockholders “cleansed” any fiduciary duty breaches.


To explain my decision to review for entire fairness, it is useful to identify the catalysts for the parties’ competing legal arguments. To state it bluntly, the knock-on effects of two decisions of our Supreme Court—Corwin and MFW—frame the standard of review controversy here. These seminal decisions offer conflicted fiduciaries two pathways to the coveted deference afforded by the business judgment rule. Elon wants that deference; Plaintiffs want to deny him that deference.

If Elon is deemed a controlling stockholder of Tesla, he cannot invoke Corwin to achieve business judgment deference. Not surprisingly, then, Plaintiffs argue that Elon is a controlling stockholder; Elon steadfastly maintains that he is not. In making their controlling stockholder argument, Plaintiffs, no doubt, are comforted by the fact that Elon, as controller, cannot invoke MFW to achieve business judgment review because the Tesla Board elected not to form an independent special committee, a predicate to the operation of MFW’s ratchet from entire fairness down to the business judgment rule. If Elon is deemed a controlling stockholder of Tesla, therefore, his conduct will be subject to the “onerous” entire fairness review since there is no question he was conflicted with respect to the Acquisition.

If Elon clears the controlling stockholder hurdle, he still has to traverse the treacherous terrain of board-level conflicts to reach business judgment arcadia. When “properly reviewable facts reveal that the propriety of a board decision is in doubt because the majority of the directors who approved it were grossly negligent, acting in bad faith, or were tainted by conflicts of interest,” the court will review the decision for entire fairness. On the other hand, if the Tesla Board was not conflicted, and Elon was not a controlling stockholder, then the business judgment rule is the standard of review. Thus, the parties understandably clash over the extent to which a majority of the Tesla Board was conflicted with respect to the Acquisition by way of self-interest or a lack of independence from those who were self-interested.

Here again, the spirit of Corwin looms large. Even if the Acquisition was approved by a conflicted Tesla Board, assuming Elon is not a controlling stockholder, the uncoerced, fully informed vote of a majority of Tesla’s disinterested minority stockholders will “cleanse” any breach of fiduciary duty by triggering business judgment deference. And so, the parties dispute whether Tesla’s stockholders were given the full and accurate information they needed to cast an informed vote in favor of the Acquisition.


As our Supreme Court has explained, though, “[t]he paramount consideration [] is whether the price was a fair one.” Much like the idiom “all roads lead to Rome,” in our law, while there are necessary stops along the way, all roads in the realm of entire fairness ultimately lead to fair price.


In addressing the fair process element of the entire fairness test, the Vice Chancellor noted process flaws and process strengths, which are summarized as follows:

Process Flaws

  • Elon’s apparent inability to acknowledge his clear conflict of interest and separate [i.e., appropriately recuse] himself from Tesla’s consideration of the Acquisition
  • Failure of the Tesla Board to implement a special independent committee to manage conflicts

Process Strengths

  • An “ultimately productive board dynamic that protected the interests of stockholders, despite Elon’s assumed ‘managerial supremacy’ and the assumed board-level conflicts”
  • The determination by the Tesla Board to condition the acquisition on the approval by a majority of the disinterested stockholders
  • Due diligence and negotiations led by the Tesla Board (and its one indisputably independent director) resulting in a reduction of the acquisition price

Weighing these and other considerations, the Vice Chancellor concluded that the acquisition ultimately satisfied the “entire fairness” test. Nevertheless, he determined not to grant Elon either attorney fees or prevailing party costs, stating that:

As for costs, as noted, Elon likely could have avoided the need for judicial review of his conduct as a Tesla fiduciary had he simply followed the ground rules of good corporate governance in conflict transactions. He declined to do so. For that reason, I decline to award him prevailing party costs.

The full opinion is linked here:

President Biden Announces Intent to Nominate Two to Serve on the Securities and Exchange Commission

By Rani Doyle

On April 6, 2022, President Biden announced his intent to nominate Jaime Lizárraga and Mark T. Uyeda to serve on the SEC. Once formally nominated, both will need to be approved by the Senate before taking roles on the Commission.