Rule 14a-8 – which is the Exchange Act rule about shareholder proposals in company proxy statements – seems to be facing a “make or break” moment. Last week, Dave shared that the House Financial Services Committee recently held a hearing on whether the shareholder proposal process continues to fulfill its intended purpose – and as John flagged, the SEC’s latest Reg Flex Agenda includes proposed rulemaking on “Shareholder Proposal Modernization.”
Even investors seem to be somewhat sympathetic to the resources that some companies spend to respond to large volumes of shareholder proposals. 43% of the investor respondents to ISS’s recent policy survey said that shareholder proponents should make a detailed, company-specific case for each proposal.
We’ve pondered a few times whether there could be a way to use state law to make shareholder proposals more manageable – not only in this blog, but at our Conferences and more than a few happy hour convos with members of this site! Now, more people are noting that the answer seems to be “yes” – at least in Delaware. Kyle Pinder of Morris Nichols Arsht & Tunnell is publishing this article that says there’s no firm basis under Delaware law for a shareholder right to submit non-binding proposals. Here’s an excerpt from the short-form version:
First, the Delaware General Corporation Law (the “DGCL”) does not contemplate (and thus does not expressly authorize) precatory stockholder proposals. Second, under Delaware law, stock ownership confers on stockholders three fundamental rights—to vote, sell and sue — from which flow certain “subsidiary rights.” Precatory stockholder proposals are inherently tied to voting rights (i.e., do stockholders have a right to vote on such proposals).
Based on a review of Delaware’s voting rights jurisprudence, this article concludes that stockholder voting rights extend to (i) the election of directors, (ii) matters committed to stockholders for approval by law, certificate of incorporation, or bylaw, and (iii) matters that the board determines to submit for a stockholder vote (including pursuant to a board decision to subject the company to a regime requiring certain precatory votes). Absent from this list of voting rights are non-binding proposals on which a stockholder forces a vote.
Because no such voting right exists, a “subsidiary right” flowing therefrom to propose precatory stockholder proposals does not exist.
Kyle points out that this gives companies a pretty huge practical advantage:
In the absence of an inherent stockholder right, corporations possess broad flexibility to provide for, and regulate, the submission of precatory stockholder proposals by bylaw provision. Facially valid bylaws are consistent with the DGCL and certificate of incorporation and are not otherwise prohibited by law.
Because stockholders do not have the inherent right to submit such proposals, and assuming the absence of a charter provision expressly granting that right, a bylaw provision providing for, and regulating, precatory stockholder proposals would be facially valid (i.e., it would not be inconsistent with a non-existent DGCL or other legal pronouncement). A reasonably tailored precatory proposal bylaw would allow a corporation to provide stockholders with, what some view as, a meaningful ability while also allowing the corporation to impose structure and safeguards with respect to precatory proposals for which a stockholder intends to solicit proxies.
There is some uncertainty regarding whether a corporation can augment the requirements of Rule 14a-8 by bylaw, although SEC Chairman (then-Commissioner) Paul Atkins and SEC Commissioner Mark Uyeda have each expressed support for private ordering. Therefore, these types of bylaws may also have the potential to apply to Rule 14a-8 proposals.
Kyle goes on to note that while a DGCL amendment may not be necessary to pave the way for these bylaws, an amendment would reduce uncertainty and mitigate litigation risks. As anyone following the “DExit” drama knows, Texas passed a law earlier this year that would allow companies to impose significantly tougher eligibility requirements on shareholder proponents.
We’ve written about the Clayton Act problems that can arise if a director simultaneously serves on boards of competing companies. The issue is easy to overlook – and it isn’t a “one & done” analysis for companies, either. M&A and changing businesses can cause companies to fall within the scope of the statute even if they previously hadn’t been competitors.
This Baker McKenzie alert warns that the DOJ & FTC haven’t lost interest in the issue. In fact, the FTC announced last week that its recent efforts resulted in the resignation of several directors. The Baker McKenzie memo recommends these actions:
– Conduct annual analyses of directors’ and officers’ board memberships to detect any emerging Section 8 interlocks. This is especially important in industries involving organic expansion, such as technology and healthcare, where new competition may emerge quickly.
– Include Section 8 compliance reviews as part of integration planning after closing an acquisition. Mergers and acquisitions can create springing interlocks, as officers or directors of newly acquired companies may serve on boards of companies that compete with the acquiring company.
– Expand compliance reviews to assess non-corporate entities. Section 8 can apply to partnerships or limited liability corporations. Accordingly, broad compliance assessments should be made across business units. Assessments should include managers who serve on non-corporate entities in a capacity that could be viewed as analogous to a corporate officer or board of director role.
– Think carefully about the scope of products and geographies when assessing “competitive sales.” Agencies have urged parties to take a “broad view” of competitive sales, noting that it may apply a different analysis for Section 8 than it would in other antitrust cases. It is therefore important to regularly review (and potentially reevaluate) how product and service revenues are categorized and measured as part of any Section 8 compliance audit.
– Develop strong organizational safeguards, such as firewalls between potentially interlocked executives and procedures for directors handling competitively sensitive information. These steps are essential for compliance. An actual or potential interlocking directorate—regardless of whether it constitutes a violation under Section 8—may facilitate, or be perceived to facilitate, a separate antitrust violation under Section 1 of the Sherman Act or Section 5 of the Federal Trade Commission Act. These safeguards should be developed and implemented even if a Section 8 exemption appears to be applicable.
Earlier this week, the SEC announced the publication of its report to Congress summarizing policy recommendations made during the SEC’s 44th Annual Small Business Forum – which covered:
– Early-stage capital raising
– Growth-stage companies and smaller funds
– Small cap companies and the public markets
The SEC’s Office of the Advocate for Small Business Capital Formation hosted the Forum back in April. This year, our very own Dave Lynn participated as a panelist – he shared reflections a few months ago from his panel on the challenges of going and being public.
The report itself summarizes each discussion and shares the top 5 recommendations for each of the highlighted lifecycle segments – along with the Commission’s response. The SEC will consider Forum recommendations for future policy initiatives.
Video archives and a transcript of the discussions are available online.
Yesterday, ISS Governance published results from its annual global benchmark policy survey, which is part of the process for developing its annual voting policy updates. Among other things, the survey asked investors and companies (non-investors) to share opinions on AI oversight and related disclosures. Here are a few of the key takeaways on investors’ views:
Respondents were asked if expecting a company significantly using AI to use a global framework (for example, OECD AI Principles, NIST AI RMF, etc.) for assessing AI-related risks is appropriate at this time. Non-investor respondents overwhelmingly selected the option “It is probably premature for most companies.” ( 84 percent) while only 16 percent opted for the remaining alternative “It is probably timely for most companies.”
On the other hand, 58 percent of the investor respondents supported the “It is probably timely for most companies” option, and the remaining 41 percent the “It is probably premature for most companies” option.
Respondents’ perspectives were sought on whether companies should publicly share how their boards are overseeing AI business or AI implementation systems with the goal of managing AI-related risks. The preferred option for both categories (54 percent for the investor respondents and 73 percent for the non-investor respondents) was “Only in cases where AI plays a significant role in the business or business strategy (where businesses already have or plan to implement significant AI use).” The answer “In all or most cases – companies/boards which do not consider it relevant can disclose and explain their rationale.” was chosen by 43 percent of investors and 13 percent of non-investors.
Respondents were also asked to what extent a board’s public disclosure of its AI oversight measures indicates its depth of understanding of AI-related issues and risks. Both investor and non-investor respondents expressed a preference for the option “Public disclosure alone does not necessarily imply a board’s solid understanding of AI.” ( 69 and 53 percent, respectively). Slightly less than one-third of non-investor respondents (29 percent) opted for the alternative “There is little general correlation between disclosure and understanding.”
The survey also asked about AI-related board expertise:
40 percent of investor respondents and 25 percent of non-investor respondent opted for the answer “Only companies where AI is central to their core business or poses significant risks would need an AI expert or dedicated committee.“, while the option “Unless AI is central to their core business or poses significant risks, it is sufficient for most boards to have access to external AI advisors when needed.“, was the favored choice of 38 percent of the investor respondents and of 58 percent of the non-investor respondents.
On The Proxy Season Blog for our members, Meredith recently shared a disclosure resource for AI-related opportunities, risks, and governance – and we’ve been tracking trends in disclosures – as well as AI-related shareholder proposals.
We’re also continuing to post resources on compliance & disclosure issues in our “Artificial Intelligence” Practice Area on this site. And don’t forget to sign up for our free blog – The AI Counsel – for daily updates on evolving AI & emerging technology risks.
In its annual global benchmark policy survey, ISS also sought input on whether board diversity info is still important to investors. As I blogged earlier this year, ISS halted application of its voting policy on that topic – but at least for this year, its research reports still have data on board diversity factors.
– 29% of investors selected “We remain focused on the importance of board, executive and workforce diversity, including diversity targets where applicable, and expect that most U.S. companies will disclose their approach to the diversity demographics of their boards as well as other DEI matters.”
– 24% of investors selected “Corporate DEI-related practices have evolved in the U.S., and disclosure on how companies assess risks or opportunities associated with DEI, whether they are scaling back or maintaining corporate DEI programs, is generally helpful for shareholders.”
– 2% of investors said “Irrespective of complexity, shareholder proposals on DEI topics are an unnecessary distraction for companies.”
– 34% of non-investors said “We no longer (or never did) consider numerical board or executive diversity targets but expect that U.S. company boards will continue to have a mix of professional and personal characteristics that is comparable to market norms and to each company’s business needs.“
For companies, this is an area where the balance of risk continues to evolve – so it will be important to have ongoing conversations about practices and disclosures, especially as proxy season approaches. Don’t forget to include perspectives from other experts and affected stakeholders in these conversations. For the legal side, that may include colleagues who specialize in employment law, government contracting, and potentially M&A and white collar defense (depending on the company’s circumstances). People outside of legal will also have views…
In addition to AI oversight and board diversity, the results from ISS’s annual global benchmark policy survey included several bread & butter governance topics. For these topics, investor respondents tended to show that they have views about “best practices” – while many companies (non-investors) want flexibility. No surprise there!
Here’s more detail on a few of the governance-related survey topics:
– Multi-Class Capital Structures – ISS asked whether “non-common” shares with more than one vote per share (other than in cases where these shares vote on an “as-converted” basis) should generally be considered the same way as common shares that have more than one vote per share.
– 71% of investors said “Yes.”
– 62% of non-investors said “No.”
As a reminder, ISS’s current benchmark policy is to recommend against directors individually, committee members, or the entire board, if the company has a capital structure with “unequal voting rights” – in the absence of sunset provisions or de minimis super-voting power.
– Independent Board Chairs – ISS noted that “independent chair” proposals seldom receive majority support (the current voting policy generally recommends a vote “for” these proposals and lists factors that the proxy advisor considers). In the survey:
– 43% of investors said an independent chair is best and that shareholder proposals calling for an independent chair are understandable.
– 38% of investors said that having an independent chair is a good practice, and companies should explain why they’re an exception to the rule.
– 51% of non-investors said a board should generally have the flexibility to determine its leadership structure.
– Director Overboarding – ISS noted that it last asked about overboarding in 2019, and some investors have changed their policies since then. Where local market best practice codes and/or regulations provide upper limits for board mandates, ISS policies globally already reflect these limits, but ISS asked about preferences when regulations aren’t in play. Here’s what they found about maximum limits:
– 26% of investors and 19% of non-investors said that 5 total board seats is appropriate.
– 25% of investors and 22% of non-investors said that 4 total board seats is appropriate.
– 9% of investors and 38% of non-investors said there should be no general limit; the board should consider its own circumstances and act accordingly.
– For CEOs, 55% of investors and 34% of non-investors believe 1 external board seat is an appropriate limit, and 39% of non-investors believe no general limit should be applied. The survey also got into other details, like whether board chair positions and connected companies should be treated differently.
The survey also covered views on shareholder proposals, shareholder written consent, say-on-pay responsiveness, director pay, executive incentive awards, and other matters. Meredith will cover the compensation-related items tomorrow on The Advisors’ Blog on CompensationStandards.com!
Earlier this year, the SEC published a concept release to explore changing the eligibility criteria for Foreign Private Issuers. This Mayer Brown memo summarizes themes from comments submitted to-date:
• A very large number of letters argued that the SEC should narrowly tailor any changes to the specific problems it intends to solve, since broad based changes may have unintended and unwanted consequences. More specifically, some letters request narrowly tailored disclosure changes focusing only on issuers that have failed to provide robust disclosure necessary to ensure the protection of U.S. investors (i.e., making “targeted, incremental changes to existing disclosure requirements applicable to FPIs accessing the U.S. markets through registered offerings or as reporting issuers”).
• Other letters favored limited, specifically tailored changes to the FPI definition for other reasons, arguing that any changes should be made in a manner that considers the impact of the definition on other terms and rules under the federal securities laws, including Regulation S and Exchange Act Rule 12g3-2(b).
• Similarly, a number of commenters stated that the SEC should be wary of potential changes that are duplicative of or contrary to existing home requirements to which FPIs adhere, and understand that the additional burden and cost of navigating the two regimes could be significant, such that some issuers may choose to exit the U.S. markets.
• Many letters argued in favor of continued reporting in IFRS, either for FPIs or for all issuers. In the alternative, if foreign issuers that lose FPI status must report in U.S. GAAP, the SEC should provide guidance and a suitable transition period (several commenters suggested a minimum of two or three years). Concern about switching from IFRS to U.S. GAAP was the most commonly repeated idea across all letters.
• Some letters advocated requiring meaningful non-U.S. trading (e.g., ≤90% of global trading in the U.S.), potentially with de-minimis exclusions for bona fide dual-listings, and providing a safe harbor for issuers listed on a designated “major foreign exchange” or in jurisdictions assessed as robust. Interestingly, a number of other letters took the opposite approach, arguing that significant non-U.S. trading is not required or helpful in demonstrating meaningful regulation of a foreign issuer.
• A few letters asked the SEC to consider carve-outs or refined eligibility criteria that preserve
FPI status for companies with genuine foreign governance and infrastructure, regardless of shareholder geography or incorporation jurisdiction.
• A number of letters advocated for a requirement that a FPI be (i) incorporated or headquartered in a jurisdiction that the SEC has determined to have a robust regulatory and disclosure oversight framework and (ii) be subject to such securities regulations and oversight without modification or exemption. Other letters suggested that the SEC should avoid any approach requiring jurisdiction-specific judgments because developing the relevant assessment criteria would be a large undertaking and require constant monitoring, straining SEC resources, and would lead to unpredictability for non-U.S. companies that are reliant upon a given jurisdiction or exchange continuing to meet the SEC’s criteria to maintain their FPI status.
• At least one letter argued that meeting a required jurisdictional threshold alone is not sufficient, and the SEC should consider not just where a company is incorporated and headquartered but should also look holistically at where the company is from, including where its directors, officers and employees reside, where its assets are held, where it earns revenue, and the citizenship and residency of any controlling beneficial owners.
• A handful of other letters argued that, in the alternative to requiring that FPIs be subject to
certain named robust regulatory jurisdictions, the SEC should identify jurisdictions of incorporation that do not have securities regulations and oversight sufficient to protect U.S. investors. Companies from these jurisdictions could be subject to the same reporting obligations and rules as domestic issuers.
• A number of letters argued that the SEC should keep the current multijurisdictional disclosure system with Canada, or MJDS, unchanged, and explore mutual recognition pilots (e.g., EU, UK, Australia) where regulatory objectives demonstrably align.
The memo says there have been about 70 responses submitted so far – mostly from law firms, FPIs and industry groups. The SEC’s Investor Advisory Committee also discussed this topic at a meeting last week. In his remarks at the meeting, SEC Chair Paul Atkins noted:
Now, to be clear, the SEC welcomes foreign companies that seek to access the U.S. capital markets. I must emphasize that the concept release is not a signal that the SEC intends to disincentivize such firms from listing on U.S. exchanges. Rather, our goal is to better understand the impact on U.S. investors and the U.S. market resulting from significant changes to the population of foreign companies listed in the United States over the last two decades.
The Center for Audit Quality recently shared these notes from a June meeting with Staff from the Division of Corporation Finance and Office of the Chief Accountant. Among other things, the Staff weighed in on transition reporting and segment reporting, as well as pro forma requirements following a reverse merger or de-SPAC transaction. Here’s an excerpt on that piece:
In de-SPAC transactions or where a public shell company acquires a private operating company, a registrant is required to provide pro forma financial information reflecting the accounting for the acquisition in a proxy or registration statement (e.g., a Form S-4). After effectiveness of the registration statement, certain subsequent filings (such as a Super 8-K reporting the transaction or subsequent registration statements) may require the registrant to update its and the target’s financial statements to remain compliant with the applicable age of financial statement requirements in Regulation S-X.
The Committee asked the staff whether the pro forma financial information reflecting the acquisition should be updated for the most recently reported periods in the Super 8-K or subsequent registration statements even if the registrant believes the update would not be material. The staff clarified that if the registrant’s financial statements were required to be updated, the pro forma financial information must also be updated. The update is required regardless of any materiality assessment.
The Committee further inquired whether pro forma financial information presented for transactions other than the one described by the Committee (i.e., transaction specified in Rule 11-01 of Regulation S-X) must be updated when the financial statements used to prepare the pro forma financial statements are required to be updated. The staff confirmed that if the financial statements used to prepare pro forma financial information are required to be updated, the pro forma financial information must also be updated. The update is required regardless of any materiality assessment.
Here’s something that Meredith blogged last week on DealLawyers.com:
Sidley recently analyzed all late-stage director contests at Russell 3000 companies in the last eight years — which includes five years pre-UPC and three years post — to understand the impact of the SEC’s universal proxy rule on contested elections. As these excerpts from their report show, the assumption that UPC would make it easier for activists to win seats didn’t exactly come to fruition as expected. The impact has been more nuanced.
The “floor” on activists’ electoral success has risen. At least one activist nominee was elected in 48% of UPC elections, up from 39%. Half of these successes have been limited to a single seat, an increase from 10% to 24% of total elections.
The “ceiling” on activist success has collapsed. Shareholders have supported at least half of the dissident slate in only 24% of UPC elections, down from 39%.
The average number of activist candidates elected under the UPC is down 22% (1.1 to 0.9 seats), and the average when a dissident wins at least one seat is down 37% (from 2.9 to 1.8 seats).
Management success has ticked down while remaining typical. “Clean sweeps” (full-slate elections) by management continue to be a majority of contested elections under the UPC (52%, down from 61%).
Activists are more often withdrawing their slates after ISS and Glass Lewis back management (13% of late-stage proxy contests under the UPC withdrew after proxy advisor recommendations, up from 9%)
Activists are more often withdrawing their slates after ISS and Glass Lewis back management (13% of late-stage proxy contests under the UPC withdrew after proxy advisor recommendations, up from 9%)
Activist clean sweeps have effectively vanished, falling from 29% of pre-UPC contested elections to none aside from the proxy contests at Masimo.
The memo says the “net effect” of these data points is that “activist victories have increased in frequency but compressed toward single-seat outcomes.” This memo and others analyzing UPC are posted in our “Proxy Fights” Practice Area on DealLawyers.com. If you aren’t already a member of that site, it is full of good info about Delaware case law, deal trends, and more. To get access, you can sign up online, email info@ccrcorp.com, or call 800.737.1271.
This week, I am at the American Bar Association Business Law Section’s Fall Meeting in Toronto, and there has been a lot of discussion at the meeting about President Trump’s Truth Social post earlier this week calling on the SEC to adopt rules that change the frequency of periodic reporting from quarterly to semiannual. As I noted in this blog, the possibility of making this type of change to the SEC reporting system was considered during the first Trump administration, but no changes were ultimately made to SEC requirements. It appears that the SEC is now prepared to reconsider the issue – this CFO Dive post notes that the following statement on the topic was received from the SEC:
“At President Trump’s request, Chairman [Paul] Atkins and the SEC are prioritizing this proposal to further eliminate unnecessary regulatory burdens on companies,” according to a statement sent to CFO Dive late Monday by an SEC spokesperson. The spokesperson in an interview Tuesday declined to comment further on what steps need to be taken by the SEC to change the quarterly reporting requirement.
The dialogue about this topic and the potential for the SEC’s renewed focus on a potential rule proposal prompted me to take a spin through the comment file from 2018-2019, and the input was decidedly mixed. Here are some highlights:
1. As might be expected, there were some reporting companies (such as this example) that were in favor of a shift to semiannual reporting, focusing on the cost savings and the ability to provide material information to investors through other communications such as earnings releases and Form 8-K filings.
2. One company suggested that the Commission consider a “triannual” reporting framework, where companies would report to the SEC every four months, instead of every three months.
3. Accounting industry commenters (such as this one) noted that companies may continue to seek auditor review of quarterly financial statements even if they do not have to file a Form 10-Q on a quarterly basis because of investor demands for that information and the need for such information when conducting securities offerings. It was also noted in comment letters that a shift toward earnings releases would complicate the ability of auditors to provide negative assurance to underwriters.
4. Investors (such as this one) expressed concern with the possibility of moving to a semiannual reporting framework, noting that a reduction in the frequency of financial information would make it difficult to manage their investment portfolios, and that earnings releases and quarterly reports provide different and valuable pieces of information.
5. Some commenters (such as this one) noted that less frequent reporting would be likely to increase the risk of insider trading, and as a result companies may be forced to reduce the length of their open trading windows.
6. One commenter suggested that the SEC conduct a pilot program that would allow a select group of companies to opt-out of Form 10-Q reporting so the agency could collect data about the approach before making any changes.
7. Some commenters (such as this one) suggested that the SEC consider revisiting the information required in quarterly reports, rather than changing the frequency of filing such reports.
8. Commenters (such as this one) suggested that the SEC consider pursuing a scaled approach to the issue, moving to semiannual reporting for smaller companies.
9. Many commenters (such as this one) resisted any suggestion that the SEC should adopt specific regulations concerning earnings releases and guidance practices, beyond the existing requirements in Item 2.02 of Form 8-K.
10. Not surprisingly, commenters expressed concerns about the problem of short-termism, but commenters were often skeptical as to whether a change in the frequency of periodic reporting would have any impact on a short-term focus by companies and investors.
Based on the comments and the SEC’s questions that prompted those comments, it is unlikely that any change in the frequency of periodic reports will mean a significant change in the frequency of financial and other information being provided to the market. We can envision a “private ordering” approach to periodic disclosure, where the earnings release will become the vehicle for updating investors and permitting companies to open their trading windows, repurchase their own shares and conduct securities offerings. This approach would likely put more pressure on current reporting, where companies may choose to file more Form 8-K filings or issue press releases to communicate material developments that they might have waited to report in the Form 10-Q under today’s reporting regime. Consistent with some of the items on the Commission’s regulatory agenda, the SEC might consider a scaled approach, where it reduces the quarterly reporting burdens for smaller companies, while retaining quarterly reports for larger companies. With all of that in mind, let’s sit back and see where this potential proposal goes from here!
