Key Considerations for 2024 Form 10-K and Form 20-F Filings

SUMMARY

As companies prepare their annual reports on Form 10-K and Form 20-F for calendar year 2024, they should consider recent changes to the disclosure rules of the U.S. Securities and Exchange Commission (“SEC”) and the implications of certain recent developments in SEC enforcement activity and rulemaking. This memorandum summarizes these disclosure considerations and highlights key changes to SEC rules that will affect Form 10-K and Form 20-F filings this upcoming reporting season.

SEC RULE CHANGES IMPLEMENTED FOR UPCOMING ANNUAL REPORTS

Under SEC rules [1] adopted in December 2022, additional disclosure and filing requirements relating to insider trading policies and procedures and, in the case of U.S. domestic reporting companies, the timing of equity awards in relation to disclosure of material nonpublic information (“MNPI”) are applicable to reporting companies for upcoming Form 10-K and Form 20-F filings. Appendix A provides an overview of the timing for compliance and other information on the new disclosure rules.

Disclosure and Filing of Insider Trading Policies. For annual reports on Form 10-K for the year ending December 31, 2024, domestic reporting companies will be required under Item 408(b) of Regulation S-K to disclose whether they have adopted insider trading policies and procedures governing the purchase, sale and/or other dispositions of the reporting company’s securities by directors, officers and employees, as well as by the registrant itself. Domestic reporting companies that have not adopted such policies and procedures (including where the insider trading policies and procedures do not govern the registrant itself) are required to include narrative disclosure explaining why they have not done so. The information must be tagged in inline XBRL and may be included directly under Item 10 of Form 10-K or incorporated by reference from a proxy statement involving the election of directors if such proxy statement is filed within 120 days of the end of the fiscal year covered by the Form 10-K. Foreign private issuers (“FPIs”) will be subject to comparable requirements under Item 16J of Form 20-F. While the SEC did not add the words “or the registrant itself” to Item 16J of Form 20-F, we expect that many FPIs will include comparable disclosure regarding policies applicable to themselves in light of the SEC’s stated intent for FPIs to provide disclosure analogous to that required for domestic reporting companies. In addition, reporting companies (including FPIs) will be required under Item 601(b)(19) of Regulation S-K or Item 16J(b) of Form 20-F, as applicable, to file their insider trading policy as an exhibit to the company’s annual report. [2] Canadian issuers that report under the multijurisdictional disclosure system (“MJDS issuers”) are not subject to these new disclosure and filing requirements.

Timing of Equity Awards Disclosure. For annual reports on Form 10-K for the year ending December 31, 2024, domestic reporting companies will be required under Item 402(x) of Regulation S-K to include (1) narrative disclosure of the company’s policies and practices regarding the timing of grants of stock options, stock appreciation rights or similar instruments and (2) tabular disclosure of each such award granted to a named executive officer within the four business days before and one business day after the filing of a periodic report or the filing or furnishing of a Current Report on Form 8-K that contains MNPI and the percentage change in the market value of the securities underlying the award between those dates. These new disclosures do not apply to restricted stock or restricted stock units. The information must be tagged in inline XBRL and may be included directly under Item 11 of Form 10-K or incorporated by reference from a proxy statement involving the election of directors if such proxy statement is filed within 120 days of the end of the fiscal year covered by the Form 10-K. Smaller reporting companies (“SRCs”) and emerging growth companies (“EGCs”) are permitted to limit their disclosures consistent with the general scaled approach to executive compensation disclosure for SRCs and EGCs. FPIs and MJDS issuers are not subject to these new disclosure requirements.

IMPLICATIONS OF RECENT ENFORCEMENT ACTIONS

Cybersecurity. On October 22, 2024, the SEC announced settled charges against four technology companies that were customers of SolarWinds (the “SolarWinds Customers”) that allegedly “negligently minimiz[ed]” the extent to which they were affected by the compromise of SolarWinds software (the “SolarWinds Compromise”) in 2020. [3] The SEC alleged that two of the companies failed to update their risk factors in response to the SolarWinds Compromise, rendering the risk factors materially misleading, and that two companies omitted material information when disclosing the impact of the SolarWinds Compromise on Form 8-K. [4] The SEC further alleged that one company had inadequate disclosure controls and procedures in connection with the compromise. [5] In connection with the settlements, the SolarWinds Customers will pay over $6 million in civil money penalties. [6] The settled charges follow the July 18, 2024 decision of Judge Paul A. Englemayer of the U.S. District Court for the Southern District of New York granting almost the entirety of a motion to dismiss the SEC’s complaint against SolarWinds and its Chief Information Security Officer, allowing only the SEC’s claim about allegedly false statements on the company’s website to survive. [7]

Two SEC Commissioners, Hester M. Peirce and Mark T. Uyeda, dissented from the SEC’s decision to charge the SolarWinds Customers, noting that the SEC was “playing Monday morning quarterback” by engaging “in a hindsight review to second-guess the disclosure” and citing only “immaterial, undisclosed details to support its charges.”  [8]

Although it remains to be seen, the SEC’s approach in the incoming presidential administration may align more closely with that of the dissenting SEC Commissioners in the SolarWinds Customers actions. In the meantime, in light of these enforcement actions, companies should be mindful that the SEC is continuing to aggressively scrutinize cybersecurity-related disclosures, including by challenging the level of detail in disclosures on specific incidents, companies’ determinations not to update risk factors in light of cybersecurity incidents and related changes in cybersecurity risk profiles and companies’ characterizations of particular incidents as immaterial. The SEC is also continuing to aggressively scrutinize companies’ disclosure controls and procedures with respect to internal escalation of potentially significant cybersecurity incidents.

Director Independence. On September 30, 2024, the SEC announced settled charges against James Craigie, the former Chief Executive Officer (“CEO”), Chairman and director of Church & Dwight Co. Inc. (“Church & Dwight”), for causing materially misleading statements in the company’s proxy statement by concealing a close friendship with a high-level company executive from the board of directors while standing for election as an independent director. [9] The SEC’s complaint alleged that Craigie frequently vacationed with the executive and the executive’s spouse and paid more than $100,000 for the couple to join Craigie on several of those vacations. According to the complaint, Craigie allegedly failed to disclose this relationship to the board and simultaneously encouraged the executive to conceal the relationship as well. Later, Craigie allegedly shared confidential information that he obtained by virtue of his status as an independent director to better position the executive after Church & Dwight began a CEO succession process. [10] If the settlement is approved, Craigie will pay a civil penalty of $175,000 and be barred from serving as a public company officer or director for five years. [11]

In light of this enforcement action, companies should review their annual questionnaire for directors and officers and consider adding or broadening the scope of existing questions to ask directors and officers to identify any free or discounted events, travel or other items of value they may have received from, or provided to, any other director or officer, other than in connection with their duties as a director or officer, in order to obtain responses relevant for the company’s independence determinations and related disclosures.

IMPLICATIONS OF RECENT RULEMAKING DEVELOPMENTS

When preparing upcoming annual reports on Form 10-K or Form 20-F, companies should keep in mind rules that have been an important component of the SEC’s rulemaking agenda but which have been stayed by court ruling or SEC order. While these rules are not in effect and will not mandate disclosures in upcoming annual reports, they address areas of high priority and focus for the current SEC. Given the uncertainty inherent in litigation timing and outcome, as well as changes in litigation strategies and policy priorities that are expected to occur following a change in presidential administration and SEC leadership, companies should monitor the status of pending litigation as well as how the topics of these stayed SEC rulemakings will be addressed under new SEC leadership.

Share Repurchases. In May 2023, the SEC adopted rules (“Repurchase Rules”) that would require domestic reporting companies and FPIs (other than MJDS issuers) to disclose information regarding share repurchases applicable to the registrant in its periodic reports. [12] On December 19, 2023, the Fifth Circuit Court of Appeals (“Fifth Circuit”) vacated the Repurchase Rules following an earlier decision finding that the SEC had acted arbitrarily and capriciously by failing to adequately address comments from the U.S. Chamber of Commerce and failing to adequately substantiate the purported benefits of the Repurchase Rules. [13] As a result, the SEC announced [14] and adopted [15] technical amendments, including to Form 10-K and Form 20-F, that (1) revert the share repurchase disclosure requirements to those in Item 703 of Regulation S-K for domestic reporting companies and Item 16E of Form 20-F for FPIs that were in effect prior to the now-vacated Repurchase Rules and (2) no longer require quarterly disclosure regarding the adoption, modification and termination of Rule 10b5-1 trading arrangements by domestic reporting companies pursuant to a new Item 408(d) of Regulation S-K. It remains to be seen what further actions the SEC will take in response to the Fifth Circuit’s decision. So far, the SEC has not publicly stated its intention for an appeal or re-proposal of the Repurchase Rules. Given the technical amendments and this uncertainty, domestic reporting companies and FPIs should conform their disclosure with Item 703 of Regulation S-K and Item 16E of Form 20-F, as applicable, and continue to monitor the SEC’s response to the Fifth Circuit’s stay.

Climate-Related Disclosure. In March 2024, the SEC adopted rules (“Climate Rules”) that would require domestic reporting companies and FPIs (other than MJDS issuers) to significantly expand the breadth, specificity and rigor of climate-related disclosures in their SEC periodic reports and registration statements. [16] In April 2024, the SEC issued an order staying the Climate Rules pending judicial review, with litigation consolidated in the Eighth Circuit Court of Appeals (“Eighth Circuit”). [17] There is significant uncertainty regarding the timing and outcome of these legal proceedings and the SEC’s approach to the Climate Rules and climate-related disclosures in general under new SEC leadership following a change in presidential administration.

Given these uncertainties and evolving legal and regulatory environment and market trends related to climate disclosure in general, companies should review and update their existing disclosures in the relevant sections of Form 10-K and Form 20-F, as applicable, and continue to monitor the status of the Climate Rules. Pending updates on the status of the Climate Rules, the SEC’s 2021 Sample Letter to Companies Regarding Climate Change Disclosure provides the latest SEC guidance in this area, including when information related to climate-related risks and opportunities may be required in disclosures in a company’s description of business, legal proceedings, risk factors and Management’s Discussion and Analysis (MD&A) under the SEC’s 2010 Climate Change Guidance.

The topics addressed above discuss recent rule changes and the implications of certain recent developments in SEC enforcement activity and rulemaking that companies should consider as they prepare their Form 10-Ks and Form 20-Fs for the upcoming reporting season. However, each company’s disclosure is unique and therefore needs to be tailored to its particular facts and circumstances. Given the rapidly changing environment, companies should start preparing their disclosures early and should review them closer to their filing date to consider whether any further updates are needed. Companies should also continue to review their disclosures in light of topics that have received SEC and investor attention in recent years, including geopolitical risk, extreme weather events, the adoption of artificial intelligence, developments in crypto asset markets and the impacts of inflation and the interest rate environment.

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1See “Insider Trading Arrangements and Related Disclosures”, SEC Release Nos. 33-11138; 34-96492; File No. S7-20-21 (December 14, 2022), available at https://www.sec.gov/files/rules/final/2022/33-11138.pdf. For further information, see our Client Memorandum: “SEC Adopts New Requirements for Rule 10b5-1 Trading Plans” (December 16, 2022), available at https://www.sullcrom.com/SullivanCromwell/_Assets/PDFs/Memos/sc-publication-sec-adoptsnew-requirements-for-rule-10b5-1-trading-plans.pdf.(go back)

2Alternatively, if a reporting company’s insider trading policies and procedures are included as part of the reporting company’s code of ethics, and the code of ethics is filed as part of the reporting company’s Form 10-K or Form 20-F, that filing would satisfy the new requirement.(go back)

3See “SEC Charges Four Companies With Misleading Cyber Disclosures” (October 22, 2024), available at https://www.sec.gov/newsroom/press-releases/2024-174.(go back)

4Id.(go back)

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7See SEC v. SolarWinds Corp., 2024 U.S. Dist. LEXIS 126640, 2024 WL 3461952 (S.D.N.Y. July 18, 2024). For further information, see our Client Memorandum: “Court Dismisses Most of SEC’s Claims Against SolarWinds and Its CISO” (July 19, 2024), available at https://www.sullcrom.com/SullivanCromwell/_Assets/PDFs/Memos/Court-Dismisses-Most-SECClaims-Against-SolarWinds.pdf.(go back)

8See “Statement Regarding Administrative Proceedings Against SolarWinds Customers” (October 22, 2024), available at https://www.sec.gov/newsroom/speeches-statements/peirceuyeda-statement-solarwinds-102224.(go back)

9See “SEC Charges Independent Director and Ex-CEO of Church & Dwight With Concealing Close Friendship With Company Executive” (September 30, 2024), available at https://www.sec.gov/newsroom/press-releases/2024-161.(go back)

10Id.(go back)

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12See “Share Repurchase Disclosure Modernization”, SEC Release Nos. 34-97424; IC-34906; File No. S7-21-21 (May 3, 2023), available at https://www.sec.gov/files/rules/final/2023/34-97424.pdf. For further information, see our Client Memorandum: “SEC Adopts New Disclosure Requirements for Issuer Share Repurchases” (May 4, 2023), available at https://www.sullcrom.com/SullivanCromwell/_Assets/PDFs/Memos/sc-publication-sec-adoptsnew-disclosure-requirements-issuer-share-repurchases.pdf.(go back)

13See Chamber of Comm. of the USA v. SEC, No. 23-60255 (5th Cir. 2023). For further information, see our Client Memorandum: “Fifth Circuit Vacates SEC’s Previously Adopted Issuer Share Repurchase Rules” (December 28, 2023), available at https://www.sullcrom.com/SullivanCromwell/_Assets/PDFs/Memos/Fifth-Circuit-Vacates-SECIssuer-Share-Repurchase-Rules.pdf.(go back)

14See “Further Announcement Regarding Share Repurchase Disclosure Modernization Rule” (February 9, 2024), available at https://www.sec.gov/newsroom/whats-new/further-announcementregarding-share-repurchase-disclosure-modernization-rule.(go back)

15See “Share Repurchase Disclosure Modernization”, SEC Release Nos. 349978; IC-35157; File No. S7-21-21 (April 8, 2024), available at https://www.sec.gov/files/rules/final/2024/34-99778.pdf.(go back)

16See “The Enhancement and Standardization of Climate-Related Disclosures for Investors”, SEC Release Nos. 33-11275; 34-99678; File No. S7-10-22 (March 6, 2024), available at https://www.sec.gov/files/rules/final/2024/33-11275.pdf. For further information, see our Client Memorandum: “SEC Adopts Final Climate-Related Disclosure Rules for Public Companies” (March 7, 2024), available at https://www.sullcrom.com/SullivanCromwell/_Assets/PDFs/Memos/SEC-Adopts-Final-Climate-Related-Disclosure-Rules-Public-Companies.pdf.(go back)

17See “Order Issuing Stay”, SEC Release Nos. 33-11280; 34-99980; File No. S7-10-22 (April 4, 2024), available at https://www.sec.gov/files/rules/other/2024/33-11280.pdf. For further information, see our Client Memorandum: “SEC Stays Climate-Related Disclosure Rules for Public Companies Pending Judicial Review” (April 5, 2024), available at https://www.sullcrom.com/SullivanCromwell/_Assets/PDFs/Memos/SEC-Stays-Climate-RelatedDisclosure-Rules.pdf.(go back)