Dodd-Frank.com

SEC Charges Company for Failing to Evaluate and Disclose Board Member’s Lack of Independence

By | January 11, 2022

The SEC announced settled charges against formerly publicly-traded Leaf Group Ltd. for failing to adequately evaluate and disclose in its annual proxy statement the lack of independence of a director and a board committee as well as an “interlocking” board-of-directors relationship between that director and Leaf’s Chief Executive Officer.

According to the SEC’s order, Leaf made material misstatements in 2020 concerning the independence of a director and the existence of an interlocking relationship between that director and Leaf’s CEO. The order finds that Leaf materially misstated that the director was independent even though he served as Chief Financial Officer of another company, for which Leaf’s CEO served as a director and whose compensation committee Leaf’s CEO chaired. The order further finds that this “compensation committee interlock” disqualified the Leaf director as independent under the listing standards of the securities exchange on which Leaf’s stock traded and also required specific disclosure, under the SEC’s Regulation S-K, in Leaf’s proxy statement. According to the order, Leaf further materially misstated the independence of a special committee that it had established to explore strategic alternatives, including a possible sale of Leaf, and also failed to maintain, during the 2019-20 period, disclosure controls concerning director independence and interlocks.

Other interesting points of the SEC order are:

  • Leaf filed a Form 8-K with an attached press release announcing the conclusion of Leaf’s strategic review and materially misstating that the Strategic Review Committee had “consist[ed] of independent directors.” Although Leaf believed that all of the directors on the committee were independent under Delaware law, the Form 8-K did not reference any alternative definition for “independence” different from the NYSE standards previously referenced in Leaf’s 2020 Proxy Statement and Form 10-K.
  • Leaf did not maintain disclosure controls or procedures to identify and analyze potential director independence and interlock issues for disclosure in its proxy statements, Forms 10-K, and Forms 8-K during 2019 and 2020. Certain of Leaf’s procedures failed, resulting in the company not collecting information from directors that would reasonably have been expected to elicit information from which the company could have assessed director independence and compensation committee interlock disclosures requirements for its 2020 Form 10-K and 2020 Proxy Statement. For example, Leaf did not send and/or collect independence questionnaires from its CEO and the new director in advance of drafting the 2020 Proxy Statement, even though it had done so in advance of drafting the prior year’s proxy statement. Additionally, Leaf did not have a procedure for complying with its written Code of Business and Ethics, which required Leaf to present director conflicts to its board of directors for potential waiver and disclosure. The new director and Leaf’s CEO each separately asked Leaf’s counsel, by September 2019, whether the new director’s CFO position posed an independence problem, but the matter was not presented to Leaf’s board for consideration and potential disclosure as a conflict of interest.
  • Leaf’s board did not consider or pass a resolution determining which of its directors qualified as “independent” under NYSE listing standards until after its 2020 annual meeting even though the 2020 Proxy Statement materially misstated that it had already made such a determination. Also, Leaf’s board passed a resolution appointing the new director to Leaf’s audit committee in May 2020 without a contemporaneous collection or review of information to determine the New Director’s “independence” under NYSE standards, instead relying on Leaf’s outdated review from 2019.

Pursuant to the order, Leaf has agreed to cease and desist from violating the SEC’s disclosure-controls, proxy-disclosure, and reporting rules and to pay a penalty of $325,000.

Leaf did not admit or deny the SEC’s findings in the order.

 

Contact Steve Quinlivan for more information.