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E-Minders April 2022
Farewell to E-Minders:
Our monthly E-Minders newsletter is going on hiatus, with this April issue being the final edition for the foreseeable future. We now offer a "weekly roundup" format for delivery of our blogs, which our readers have indicated is more useful than a monthly summary in light of today's fast-paced developments. Sign up for blog emails here - it's free! Thank you for being a loyal Eminders subscriber - we look forward to your continued readership and involvement in TheCorporateCounsel.net community!
In This Issue:
E-Minders is our monthly e-mail newsletter containing the latest developments and practical guidance for corporate & securities law practitioners.
We view TheCorporateCounsel.net as the gathering place for the community and encourage those who aren't yet members to check out what's included. All of our memberships are backed by our "100-Day Promise" - during the first 100 days as a newly activated member, you may cancel for any reason and receive a full refund! Here are "12 Good Reasons" to try us now. Email firstname.lastname@example.org or call 800-737-1271 for more information.
It's Here! New Membership Resources at PracticalESG.com: We're thrilled to have launched PracticalESG.com. Similar to TheCorporateCounsel.net and other CCRcorp sites, a membership will allow you to take a giant step forward by connecting the dots on complicated issues. Subscribers to our free PracticalESG.com blog can continue to read our take on what ESG developments mean to companies & their advisors on a daily basis. With a PracticalESG.com membership, though, you'll gain the additional benefit of a filtered content library (a huge help for anyone trying to wade through the deluge of ESG info and make sense of it all) - as well as checklists, guidebooks, member-exclusive blogs, and benchmarking surveys. You'll also be able to access regular programming and a community Q&A forum, which means you can learn from and trade ideas with other practitioners in the ESG trenches. And it's all being led by folks with decades of experience with Environmental, Social & Governance issues.
Email email@example.com today - or call 1-800-737-1271 - to get tools to make your ESG efforts easier & more successful.
It's Here! 2022 Edition of "Executive Compensation Disclosure Treatise": The highly anticipated 2022 Edition of Lynn & Borges' "Executive Compensation Disclosure Treatise" is here. With heightened attention being paid to executive & director pay, and responsiveness to say-on-pay votes being more important than ever, the latest edition is critical for the upcoming proxy season. Here's the "Detailed Table of Contents" listing the topics so you can get a sense of the Treatise's practical nature. Order a hard copy on CompensationStandards.com. As always, Dave Lynn and Mark Borges have ensured that the treatise is comprehensive and practical.
It's Here! 2022 Edition of "Proxy Season Disclosure Treatise": Liz Dunshee has wrapped up the 2022 Edition of the "Proxy Season Disclosure Treatise" — the definitive guidance on proxy season disclosure. The entire treatise spans 1900 pages and 34 chapters - all carefully organized for easy navigation. It includes updates from the SEC's flurry of 2020 rulemaking, as well as fresh insights on the SEC comment process from former Corp Fin Staffers Sonia Barros and Sara von Althann. Here's the "Detailed Table of Contents" listing the topics so you can get a sense of the Treatise's practical nature. Order today on TheCorporateCounsel.net so that you can have your copy in time for the upcoming proxy season.
It's Here! New Edition of "Practical Corporate Governance Treatise": The latest edition of our "Practical Corporate Governance Treatise" is here. With nearly 1700 pages of well-organized guidance - in the form of over 300 checklists - this is an essential resource for in-house and outside counsel alike. Order today on TheCorporateCounsel.net to get your copy now!
Our Enhanced "In-House Accelerator": If you're relatively new to being in-house - or you want to improve your client work by gaining that perspective - take advantage of our "In-House Accelerator." We're now offering an enhanced version as an add-on exclusively to members of TheCorporateCounsel.net, which makes practical guidance from across the site accessible - all in one place. This training consists of 221 FAQs from our "In-House Accelerator" paperback (here's the "Table of Contents") - which you can either read online or listen to via our podcast series. Then, test your knowledge with our quizzes!
Deal Lawyer Training: 2022 Edition of Jenkins' "Practical M&A Treatise": Based on his 30+ years of deal work, members are saying that John Jenkins' "Practical M&A Treatise" should be required reading for all M&A associates. The 2022 Edition includes 150 pages of new material on pandemic-related "busted deal" litigation, the rise of "contractual fraud" claims in the M&A context, developments in antitrust merger review & enforcement, and more.
Spanning over 750 pages, John writes in a practical style - using stories & examples to make even the most complex deal issues easy-to-understand. Here's the "Detailed Table of Contents" listing the topics so that you can see for yourself. Order the hard copy of this popular training tool today on DealLawyers.com, or access it online as part of a platinum DealLawyers.com membership!
The "Deal U. Workshop" Is On: Our "Deal U. Workshop" is the perfect way to train those new to working on M&A. Each attendee receives access to these three practical resources:
In addition, we will provide the administrator of your Deal U. workshop with quizzes that you can use to track participants' progress. Register today and equip your new lawyers with a quick and entertaining on-ramp to their deal practice.
Upcoming Webcasts on TheCorporateCounsel.net:Join us on April 12th for the webcast - "Parsing the SEC's New Climate Disclosure' Proposal" - to hear from Sidley Austin's Sonia Barros, The Travelers Companies' Yafit Cohn, NuStar Energy's Mike Dilinger, PracticalESG.com's Lawrence Heim and Morrison & Foerster's Dave Lynn, discuss the latest expectations and hear the panelists give practice pointers for the current season on meeting format & logistics, tricky vote tabulations, officer & director participation and rules of conduct. We are making this PracticalESG.com webcast available as a bonus to members of TheCorporateCounsel.net.
Join us on April 19th for the webcast - "The (Former) Corp Fin Staff Forum"- to hear from Sidley Austin's Sonia Barros, WilmerHale's Meredith Cross, Gibson Dunn's Tom Kim, Broadridge's Keir Gumbs and Morrison & Foerster's Dave Lynn weigh in on the latest rulemakings - and interpretations - from the Corp Fin perspective. They will discuss the most important initiatives at the SEC and Corp Fin - and provide practical guidance about what you should be doing as a result.
There is no cost for these webcasts if you are a member of TheCorporateCounsel.net. If you are not a member, sign up today for access to these critical discussions by emailing firstname.lastname@example.org or calling us at 800.737.1271.
Upcoming Webcast on PracticalESG.com: Join us on April 12th for the webcast - "Parsing the SEC's New Climate Disclosure' Proposal" - to hear from Sidley Austin's Sonia Barros, The Travelers Companies' Yafit Cohn, NuStar Energy's Mike Dilinger, PracticalESG.com's Lawrence Heim and Morrison & Foerster's Dave Lynn, discuss the latest expectations and hear the panelists give practice pointers for the current season on meeting format & logistics, tricky vote tabulations, officer & director participation and rules of conduct.
Join us on May 10th for the webcast - "Putting the 'G' First: Oversight of 'E' & 'S' in ESG" - to hear from Sunrun's Sundance Banks, Delta Airlines' Stephanie Bignon, Orrick's JT Ho, and American Express' David Kanarek discuss how to develop E&S oversight programs and how to put them into practice.
There is no cost for these webcasts for PracticalESG.com members. If you are not a member, sign up online - or by emailing email@example.com or calling us at 800.737.1271.
PracticalESG.com's Free DEI Workshop Series: Register Now! Coming up soon, join us for a 3-part virtual workshop - to deliver much-needed practical guidance on how to use data to drive DEI decisions and to measure impact. Not only do we have a fantastic lineup of content and speakers, this event is FREE to attend!
You can sign up for each of our 3 sessions, or whichever ones fit your schedule. After the live event, the sessions will also be available on-demand to members of PracticalESG.com. Here's more detail about the series (each session will run from 2:00 - 3:30pm Eastern):
SEC Rulemaking Deluge: New Resource to Keep You on Track
The flurry of recent SEC proposals - including on climate change disclosure, Rule 10b5-1 plans, buybacks and cyber disclosure - suggests that the floodgates are opening for Chair Gary Gensler's regulatory agenda. And it comes on the heels of a very active conclusion to the term of prior SEC Chair Jay Clayton. The Commission has now bestowed us with 20+ rule changes and proposals over the past two years! Are you keeping up?
Some of us are having a hard time remembering what has recently changed - and what might be changing in the near future. In response to member requests, we've created this "cheat sheet" to track selected rulemaking and show where on our site you can find practical guidance on each topic. You can find the cheat sheet via the blue nav bar at the top of the home page.
We are always open to suggestions on new ways to help our members look good. Email us any time to share what would make your work life easier.
The SEC's Climate Disclosure Proposal Is Here
In mid-March, the SEC issued its long-awaited climate disclosure proposal. The Commissioners voted 3-1 in favor of issuing the proposed amendments. Here's the 3-page Fact Sheet, and here are supporting statements from SEC Chair Gary Gensler, Commissioner Lee and Commissioner Crenshaw, and the dissenting statement from Commissioner Peirce. This write-up from our very own Dave Lynn explains key things to know:
The proposed amendments to the Commission's rules would require that public companies include extensive quantitative and qualitative information about climate change in their annual reports and registration statements. The earliest that these disclosures would be required if adopted is in 2024 for the largest public companies. The rule proposals are wide ranging and would require that companies add new sections to their annual reports and registration statements that would provide details about climate change matters that are today often disclosed in separate communications outside of the SEC reporting system.
Most significantly, the SEC would require specific disclosure of a public company's direct GHG emissions (Scope 1) and indirect GHG emissions (Scope 2), as well as indirect emissions form upstream and downstream activities (Scope 3), but in the case of Scope 3 emissions only if material or if the company has set a goal that includes Scope 3 emissions. Disclosures about Scope 3 emissions would be subject to a safe harbor for liability under the federal securities laws and would not be required from smaller reporting companies. For disclosures concerning Scope 1 and Scope 2 emission, companies would be required to file an attestation report covering the disclosures and to provide certain related information about the service provider that prepared the attestation report, which need not be an independent auditor but must meet certain requirements. If these requirements were adopted, public companies would have to rapidly develop processes and procedures that will support the public disclosure of this information in SEC filings.
Among other provisions, the proposed rules would require specific information about climate-related goals or targets that have been set by public companies, including the scope of such goals or targets, data demonstrating progress in meeting such targets, the plans for meeting the goals or targets and information about the use of carbon offsets or renewable energy certificates. Such disclosures, to the extent they are forward-looking, would be protected from certain liability provisions by the safe harbor for forward-looking statements in the Private Securities Litigation Reform Act.
While the Commission did not select one set of standards regarding climate change as the basis for these proposed disclosure requirements, it did model the proposed climate-related disclosure framework in part on the TCFD's recommendations and also draws upon the GHG Protocol. In this way, certain of the proposed disclosure requirements will be familiar to those public companies that are already providing information under these pre-existing standards.
The breadth and complexity of the Commission's proposal is certain to draw a significant amount of comment from interested parties, and there will certainly be threats of potential litigation if the rules are adopted in a manner similar to the proposals. As a result, it could prove challenging for the SEC to bring these proposals to final adoption and to implement them in the time frames that have been proposed.
Cybersecurity: SEC Proposes Cyber Disclosure Rules
In early March, the SEC announced that it was proposing a series of new rules focusing on enhanced disclosure of cybersecurity issues by public companies. Here's the 129-page proposing release and here's the 2-page fact sheet. The proposed rules would require current reporting & periodic updating about material cybersecurity incidents, and periodic disclosures about policies and procedures to address cybersecurity risks. In addition, companies would be required to disclose management's role in implementing cybersecurity policies & the board's cybersecurity expertise. This excerpt from the fact sheet spells out the specifics, and notes that the SEC proposes to:
Commissioner Peirce dissented from the proposal. In her dissenting statement, she argues that "the governance disclosure requirements embody an unprecedented micromanagement by the Commission of the composition and functioning of both the boards of directors and management of public companies," and that the granular nature of the proposed disclosure requirements makes them "look more like a list of expectations about what issuers' cybersecurity programs should look like and how they should operate."
The criticism of the rule as "micromanagement" of governance may be a fair comment, but if Commissioner Peirce thinks that kind of thing is unprecedented, she may want to take another look at what governance disclosures are already required by Item 407 of S-K. In any event, the comment period will end 60 days following publication of the proposing release on the SEC's website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.
Restatements: Chief Accountant's Statement on Materiality Assessments
In mid-March, the SEC's Acting Chief Accountant, Paul Munter, issued a statement addressing the assessment of materiality in the context of errors in financial statements. The statement reviews the applicable requirements and addresses some of the Staff's concerns about how issuers approach correcting errors based on recent interactions.
In particular, the statement notes that the Staff has observed that "some materiality analyses appear to be biased toward supporting an outcome that an error is not material to previously-issued financial statements, resulting in "little r" revision restatements." One of the areas that the statement specifically calls out is the need for greater objectivity in assessing qualitative materiality:
One area where the staff in OCA have observed an increased need for objectivity is in the assessment of qualitative factors. The interpretive guidance on materiality in SAB No. 99 speaks to circumstances where a quantitatively small error could, nevertheless, be material because of qualitative factors. However, we are often involved in discussions where the reverse is argued—that is, a quantitatively significant error is nevertheless immaterial because of qualitative considerations. We believe, however, that as the quantitative magnitude of the error increases, it becomes increasingly difficult for qualitative factors to overcome the quantitative significance of the error.
We also note that the qualitative factors that may be relevant in the assessment of materiality of a quantitatively significant error would not necessarily be the same qualitative factors noted in SAB No. 99 when considering whether a quantitatively small error is material. So it might be inappropriate for a registrant to simply assess those qualitative factors in reverse when evaluating the materiality of a quantitatively significant error. Such a scenario highlights the importance of a holistic and objective assessment from a reasonable investor's perspective.
There's a lot to digest in this statement, but one takeaway is that it's yet another indication that the Staff has cast a gimlet eye on the growth in "little r" restatements over the past decade. Along those lines, the statement points out that while some attribute the trend toward little r restatements primarily to improvements in ICFR & audit quality, the Staff continues to monitor this trend in order to understand "the nature and prevalence of accounting errors and how they are corrected." In other words, if you conclude that a little r restatement is sufficient to correct an error, you can expect a lot of questions from the Staff if your filings are pulled for review.
SEC Proposes Monthly Disclosures About "Big Shorts"
Recently, the SEC announced a proposal that would increase public info of short sale data. Even though we've been mainlining news alerts for about 8 hours/day lately, it has mostly been about war, sanctions, heroism & tragedy. The SEC didn't share its usual series of emails when it was issued (maybe our friends at the Commission were also focused on other things). Here's the gist of it:
New Exchange Act Rule 13f-2 and the corresponding Form SHO would require certain institutional investment managers to report short sale related information to the Commission on a monthly basis. The Commission then would make aggregate data about large short positions, including daily short sale activity data, available to the public for each individual security.
The fact sheet explains that proposed Rule 13f-2 and the related proposed Form SHO are designed to fulfill the SEC's Dodd-Frank mandate to make short sale data publicly available. It gives this additional detail on what would be required:
The proposed rule would require institutional money managers to file confidential Proposed Form SHO with the Commission via EDGAR, within 14 calendar days after the end of each calendar month, with regard to each equity security and all accounts over which the manager meets or exceeds either of the following thresholds:
The information a manager would report includes:
The Commission would publish, based on information reported in Proposed Form SHO:
To supplement the short sale data, the release also proposes a new Rule 205 under Regulation SHO - which would require brokers to include new "buy to cover" marking on purchase orders if they have any short position in the same security at the time the order is entered. This amendment would expand on the markings currently required on the sales side for "long," "short," or "short-exempt" orders. The Commission also issued related proposed amendments to the consolidated audit trail under Rule 613 of the Exchange Act that would require CAT reporting firms to report the "buy to cover" info to CAT and to indicate where it's asserting the "bona fide market making exception" under Regulation SHO. The idea with this fine-tuning to the order process is that it would help the Commission identify short squeezes and other abusive trading practices that may contribute to market volatility.
As this MarketWatch article explains, this proposal fits in nicely with SEC Chair Gary Gensler's overall goal of market transparency. His supporting statement reinforces the goal of public visibility into short sale activity and the ongoing effort of the Commission to understand market volatility & stress - specifically, the role that short selling might play in market events. Commissioner Hester Peirce also issued a statement in support of the proposal. She's interested in hearing from commenters whether these disclosure obligations are appropriate in light of the transparency objectives of Section 929X and the proposed rule and how they may affect trading strategies and market making activity in our markets.
The comment period runs until 30 days after the date the proposal is published in the Federal Register or April 26th - whichever is later.
Note, this is different than the rulemaking petition about short reports that we blogged about in February. We're posting memos about this proposal in our "Short Sales" Practice Area, where members can get all the info about what it means to companies.
Securities Lending Transparency: Re-Opened Comment Period
In late February, the Commission issued this 4-page release to reopen the comment period on proposed Exchange Act Rule 10c-1. That rule was proposed just before Thanksgiving last year. It wouldn't directly impose obligations on issuers, but the info could be of interest. Here's the original 184-page proposing release and the 2-page fact sheet. Here's more detail:
Proposed Rule 10c-1 is designed to increase the transparency and efficiency of the securities lending market by requiring any person that loans a security on behalf of itself or another person to report the material terms of those securities lending transactions and related information regarding the securities the person has on loan and available to loan to a registered national securities association.
Although the original comment period just expired in early January, the Commission is formally re-opening it in light of the implications of proposed Rule 13f-2. The new comment period expires 30 days after the date the re-opening proposal is published in the Federal Register.
Third Time's the Charm? SEC Re-Proposes Removing Credit-Rating References from Reg M
In mid-March the SEC announced this 98-page release to re-propose amendments to Reg M that would remove the references to credit rating agencies from existing exceptions provided in Rule 101 and Rule 102. Section 939A of the Dodd-Frank Act directed the Commission to remove references to credit ratings included in certain rules, and this is the SEC's third attempt for these particular amendments: they were initially proposed in 2008, and then re-proposed in 2011. The Fact Sheet explains what the proposal aims to do:
Proposed Amendments to Regulation M
The Commission proposed to remove the requirement that nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities be rated investment grade by at least one nationally recognized statistical rating organization. In place of that requirement, under Rule 101, the Commission proposed to except (1) nonconvertible debt securities and nonconvertible preferred securities of issuers having a probability of default of less than 0.055%, as measured over certain period of time and as determined and documented using a "structural credit risk model," as defined in the rule, and (2) asset-backed securities that are offered pursuant to an effective shelf registration statement filed on the Commission's Form SF-3. The Commission proposed to eliminate from Rule 102 the existing exception for investment grade nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities.
To aid the Commission in its examination and oversight of broker-dealers who are distribution participants or affiliated purchasers and rely on the proposed exception in Rule 101 for certain nonconvertible debt securities and nonconvertible preferred securities, new paragraph (b)(17) of Rule 17a-4 would require those broker-dealers to retain the written probability of default determination supporting their reliance on the exception. Rule 17a-4(b)(17) would require broker-dealers relying on Rule 101's exception for certain nonconvertible debt securities and nonconvertible preferred securities to preserve, for a period of not less than three years, the first two years in an easily accessible place, the written probability of default determination.
The comment period will remain open for 60 days following publication of the proposing release on the SEC's website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer. We'll be posting memos in our "Credit Ratings" Practice Area.
Digital Assets in the Spotlight: The Biden Administration's Executive Order
In early March, President Biden signed an Executive Order titled "Executive Order on Ensuring Responsible Development of Digital Assets." The Executive Order outlines a whole-of-government approach to ensure responsible innovation in digital assets. As this Cleary alert notes:
The Order emphasizes the link between federal action and national security - both in terms of ensuring appropriate regulation and in staking out a U.S. leadership role in developing digital asset technology. Notably, in an area where some federal agencies have been criticized for moving slowly or failing to coordinate with each other, the Order mandates interagency cooperation on a series of reports, with most to be finished during 2022. The Order sets the stage for an active and potentially transformative year for U.S. regulation of digital assets.
The Order also sets out six principal policy objectives:
Check out more coverage of the Executive Order in our "Initial Coin Offerings/Crypto Financings" Practice Area.
Climate Change: Biggest Single Topic For Shareholder Proposals
While big institutional investors push the SEC for climate disclosure rules that would make it easier to compare corporate info, the grassroots effort among smaller shareholder proponents also shows no signs of stopping. Climate proposals are proliferating in both number & type, according to the 112-page "Proxy Preview" issued in early March by As You Sow, Si2 and Proxy Impact. Here's an excerpt (also see the resources in our "Proxy Season" and "Shareholder Proposals" Practice Areas):
Climate change has jumped to the top of the proxy season agenda this year and is the biggest single topic. Climate-related concerns undergird a growing number of proposals that seek consistency between corporate policy and political influence, too. Resolutions about environmental management also implicitly address the climate, but so do new human rights resolutions about environmental justice. In all, there are 145 proposals about the environment, up substantially from 91 last year.
The report also shares these stats:
These trends don't just create headaches for management and securities lawyers - they're affecting director support. That's one reason why creating, maintaining & disclosing a viable net-zero transition plan is becoming so important.
BlackRock's Letter to Shareholders: Global Crisis No Match For Capitalism
You can imagine that Larry Fink, the co-founder, Chair & CEO of the world's largest asset manager, sat down 6 weeks ago to start outlining his letter to shareholders and vetting everything through the appropriate channels. There were plenty of important issues to cover - the net zero transition, human capital, inflation. Then Russia invaded Ukraine. Governments and private companies are cutting ties, the world order has been upended, we're witnessing a massive humanitarian crisis, and BlackRock had to make some key recalculations & decisions in a very uncertain regulatory environment - including how to handle portfolios with Russian securities. BlackRock's success & shareholder returns are very much tied to macroeconomic conditions.
The letter to shareholders that was posted in mid-March (and filed in multiple formats on Edgar as additional soliciting material) is remarkably responsive to these recent developments, in line with the speed at which many companies took action. Larry Fink says that the way things are playing out reinforces BlackRock's approach to using capitalism for good:
These actions taken by the private sector demonstrate the power of the capital markets: how the markets can provide capital to those who constructively work within the system and how quickly they can deny it to those who operate outside of it. Russia has been essentially cut off from global capital markets, demonstrating the commitment of major companies to operate consistent with core values. This "economic war" shows what we can achieve when companies, supported by their stakeholders, come together in the face of violence and aggression.
He goes on to say that supply chains and the inflationary impact will become even more important:
Russia's aggression in Ukraine and its subsequent decoupling from the global economy is going to prompt companies and governments worldwide to re-evaluate their dependencies and re-analyze their manufacturing and assembly footprints - something that Covid had already spurred many to start doing.
And while dependence on Russian energy is in the spotlight, companies and governments will also be looking more broadly at their dependencies on other nations. This may lead companies to onshore or nearshore more of their operations, resulting in a faster pull back from some countries. Others - like Mexico, Brazil, the United States, or manufacturing hubs in Southeast Asia - could stand to benefit. This decoupling will inevitably create challenges for companies, including higher costs and margin pressures. While companies' and consumers' balance sheets are strong today, giving them more of a cushion to weather these difficulties, a large-scale reorientation of supply chains will inherently be inflationary.
We admit we were surprised to not find anything in this letter about cybersecurity or disinformation, or any specific references to China. But those topics aside, it does have something for almost everyone - which makes sense, given the wide-ranging fallout of this war and the many issues that BlackRock and its portfolio companies are dealing with. On crypto:
Finally, a less discussed aspect of the war is its potential impact on accelerating digital currencies. … As we see increasing interest from our clients, BlackRock is studying digital currencies, stablecoins and the underlying technologies to understand how they can help us serve our clients.
On the net-zero transition:
Longer-term, I believe that recent events will actually accelerate the shift toward greener sources of energy in many parts of the world. During the pandemic, we saw how a crisis can act as a catalyst for innovation. Businesses, governments, and scientists came together to develop and deploy vaccines at scale in record time.
To ensure the continuity of affordable energy prices during the transition, fossil fuels like natural gas will be important as a transition fuel. BlackRock's investments - including one late last year - on behalf of our clients in natural gas pipelines in the Middle East are a great example of helping countries go from dark brown to lighter brown as these Gulf nations use less oil for power production and substitute it with a cleaner base fuel like natural gas.
On client-directed voting:
Much like asset allocation and portfolio construction, where some clients take an active role while others outsource these decisions to us, different clients are interested in different levels of involvement when it comes to casting proxy votes. After talking with our clients, we used new technology and other innovations to offer proxy voting choice. This is now available to institutional clients representing just over $2 trillion of index equity assets, including public pension funds serving over 60 million people. We see this as just a first step. Our ambition over time is to continue developing new technologies and working with industry partners to expand voting choice for even more clients.
On board oversight of strategy and recent downturns in performance, slotted in to the mid-section of the letter:
Our strategy, which we regularly review with our Board of Directors, remains rooted in our commitment to serving clients over the long term. We will: keep alpha at the heart of BlackRock; accelerate growth in iShares, private markets, and Aladdin; deliver whole portfolio advice and solutions to our clients and be the global leader in sustainable investing. Successful execution of this strategy will enable us to continue delivering industry-leading organic growth and generate value for our shareholders over the long term.
On BlackRock's attention to internal human capital issues:
At the same time, we recognize the pandemic has redefined the relationship between employers and employees. To retain and attract best-in-class diverse talent, we need to maintain the flexibility of working from home at least part of the time. And our Aladdin technology has given us the flexibility to quickly pivot our operating model over these past two years, which will continue to be important given the uncertainty of the pandemic and the threat of new variants emerging.
We also remain focused on investing in our employees' experience with BlackRock in other important ways: improving training and development, expanding mental health services and other benefits, and continuing to advance diversity, equity and inclusion (DEI) to make sure we're broadening representation across the firm and cultivating an inclusive culture.
On Board composition:
We also give careful consideration to the composition of our Board to ensure it is positioned to be successful over the long term. We are committed to evolving our Board over time to reflect the breadth of our global business and look for directors with a diverse mix of experience and qualifications. We will continue to introduce fresh perspectives and make diversity in gender, race, ethnicity, nationality, age, career experience and expertise, as well as diversity of mind, a priority when considering director candidates.
In times of crisis, many companies take the very reasonable approach of saying that they're monitoring events and will respond accordingly. What's impressive about this particular letter, even though it's still just words on a page, is that it "shows" rather than "tells." The level of detail puts to rest any doubts that the board & management are thinking through the evolving situation from all angles, while not losing sight of the core business strategy and commitments. Larry Fink and team didn't gain $10 trillion in assets under management without being master communicators.
BlackRock's 2022 Engagement Priorities: Director Accountability For Long-Term Value
In a sign that the height of shareholder engagement season is approaching, BlackRock Investment Stewardship has released its 2022 Engagement Priorities. The asset manager's priorities are broadly the same as last year - which mapped to the UN Sustainable Development Goals - and signal a continued focus on board processes and accountability for long-term value creation.
The 10-page summary document identifies "Key Performance Indicators" for each of the main priorities. On top of the summary, BIS issued updated versions of its very detailed commentary on its engagement approach to:
Each of these commentaries walks through BlackRock's specific expectations and lists typical questions that they ask in engagement meetings. In total, the Investment Stewardship team published 53 pages of comprehensive guidance - on top of the 23-page voting guidelines and 20-page investment stewardship principles already issued. Hopefully that means that companies will be able to avoid any "gotchas" or surprises during engagements - and even more importantly, when it comes time to vote.
We're posting this guidance in our "Shareholder Engagement" Practice Area along with other useful commentaries - so members can visit that library of info along with our collection of investor voting policies throughout proxy season.
State Street's Voting & Engagement Guidelines: Annual Update is Here
After releasing a bunch of guidance earlier this year on its priorities & expectations, State Street Global Advisors has now also recently updated the following documents to reflect its positions:
This 6-page summary of material changes outlines the most significant changes, which include:
These updated policies & guidelines are posted along with other
CII Updates Recommended Corporate Governance Policies
In early March, the Council of Institutional Investors announced that it had approved revisions to CII's recommended Corporate Governance Policies on shareowner meetings and poison pills.
The updated policy on shareowner meetings expresses a preference for in-person meetings but gives companies flexibility to choose the format that best reflects their shareowner base and current circumstances. The policy also encourages companies to disclose the circumstances under which virtual-only meetings would be held. It also recommends giving shareholders who are participating electronically rights and opportunities comparable to those participating in person. The revised policy on poison pills asks companies to hold a shareowner vote on a poison pill no later than a year after the pill's adoption by the board. It also asks companies to refrain from adopting pills that contain certain provisions, such as extremely low triggers.
Climate Change Proposal: What Will the Legal Challenges Look Like?
One thing about the SEC's climate change rule proposal seems pretty certain - if the rules are adopted in their current form, they are going to face legal challenges. On what grounds might the validity of the SEC's climate change rules be subject to attack? This excerpt from Davis Polk's recent blog on the rule proposal provides some insights:
Challenges to the SEC's statutory authority. Nothing in the federal securities laws expressly authorizes the SEC to require the disclosures contemplated by the proposal. Instead, these laws generally permit the SEC to require disclosure that is "necessary or appropriate in the public interest or for the protection of investors."
One of the SEC's central arguments in support of its authority is that many investors—including certain large institutional investors—have expressed a desire to receive climate-related disclosure. However, public interest alone may not be enough to meet the statutory threshold, if a hypothetical "reasonable investor" would not find the required disclosure necessary for investment or voting purposes. This may also make it more difficult for the SEC to demonstrate that it has met its obligation to show that the benefits of the new requirements outweigh their costs.
This challenge is likely to be bolstered by the "major questions" doctrine, which provides that agency rules of major significance be the subject of a clear delegation of Congressional authority (and was relied on by the Supreme Court to nix the Biden Administration's COVID-19 vaccine and eviction moratorium policies).
First Amendment challenges. The proposal is also likely to be challenged as violating the First Amendment, by compelling speech. This topic has received close scrutiny by the Supreme Court in recent years in other cases involving corporate speech.
If you're looking for more information on the "major questions" doctrine, check out this Arent Fox Schiff memo. As to the First Amendment issues, Liz blogged last year about a letter from West Virginia's AG threatening to bring an action on that basis against any ESG-related rulemaking by the SEC and you can check that out for more details on the First Amendment argument. Meanwhile, this post on the Business Law Prof Blog lays out an argument supporting the validity of the proposed rules.
Russia Sanctions: What Questions Should the Board be Asking?
The war in Ukraine has prompted the United States and other Western nations to impose unprecedented sanctions on Russia, Belarus and certain of their financial institutions, companies and individuals. The breadth of these sanctions is like nothing we have seen in our lifetimes, and the impact of these sanctions can be far-reaching given the integration of Russia into the global economy prior to the invasion of Ukraine.
Dave recently spoke with his colleague John Smith on MoFo's Above Board podcast to better understand the sanctions landscape and to find out what issues companies and board of directors should be focused on when trying to understand how sanctions could impact their operations. Prior to joining MoFo as co-head of the firm's National Security practice, John was the Director of the U.S. Treasury Department's Office of Foreign Assets Control, often referred to as OFAC, which administers and enforces economic and trade sanctions based on U.S foreign policy and national security goals.
As noted in the podcast, the extraordinary sanctions should prompt companies and boards to assess their legal exposure to Russia and Belarus, as well as their reputational exposure arising from ongoing business with the sanctioned regimes, entities or individuals. Banking sanctions could have significant implications for ongoing and future financial transactions beginning this week, as some Russian banks are banned from participation in the SWIFT network, which is the backbone of the global payment network. Companies also need to be particularly cognizant of individuals or entities who are subject to "blocking" sanctions, which make those parties off-limits for any transactions, as well as "correspondent account" sanctions (which impact the ability of banks subject to sanctions to conduct transactions with U.S. banks) and debt and equity restrictions (which limit investment in and financing of sanctioned entities).
The Invasion of Ukraine & Corporate ESG
We are resharing a blog that Lawrence wrote in early March for PracticalESG.com. Since then, several more companies have announced that they are suspending operations in Russia - including Boeing, Disney, Exxon and Ford. For more on these complicated issues, also see Matt Levine's Bloomberg column about writing down Russian assets and whether weapons funding is now an ESG investment:
The human and global security costs of the Ukraine situation are hard to think about. Without a doubt, people and families living in the country are affected in ways words can't adequately reflect. That words are inadequate may be good - because it shows the meaning of actions. Actions undertaken by companies in the next days can have meaningful lasting impacts.
Some companies (such as BP and Equinor) have already announced steps they are taking to reduce or eliminate business interests in Russia. The White House issued new sanctions on the largest Russian financial institutions and a number of "Russian elites." The OECD announced it terminated discussions with Russia and is reviewing the country's involvement in various aspects of the organization. Dave Lynn recently wrote that U.S. companies are starting to consider how to manage and disclose bans, sanctions and prohibitions that could impact them. Each new action taken by governmental and quasi-governmental organizations will have domino effects.
ESG as a corporate initiative faces an unprecedented and acute challenge. The magnitude and speed of Russia's actions did not allow companies to conduct advance analysis and preparation, yet companies need to respond sooner rather than later. A few things we expect to see with regard to ESG activity for the foreseeable future include:
Lawrence's book - "Killing Sustainability" - also gets into the practical aspects of defining ESG and making decisions in an evolving ESG framework. A brand new, updated edition of that resource is available in the "guidebooks" section of PracticalESG.com.
IPOs: Board Diversity Planning Isn't Optional
Companies that decide to defer their IPO plans in light of current market conditions would be wise to spend some time on efforts to improve the diversity of their boards. This WilmerHale memo (p. 13) addresses SEC & Nasdaq rules, proxy advisor & institutional investor policies, state law requirements and other drivers of increased board diversity that need to be considered in the IPO planning process. Here's an excerpt on the growing number of state law initiatives addressing board diversity:
States are playing an increasingly active role in promoting board diversity among companies that are incorporated under their laws or satisfy other criteria. For example, California and Washington mandate specified levels and types of board diversity, while Illinois, Maryland and New York mandate disclosure regarding board diversity. Other states are considering mandatory board diversity legislation, or have adopted (or are considering) non-binding resolutions urging public companies to increase board diversity. This is a quickly evolving area; companies need to monitor developments in applicable states to remain in compliance.
The memo also points out Goldman Sachs' decision not to underwrite deals for companies that don't satisfy board diversity standards. While it says that other bulge-bracket banks haven't as yet followed suit, it also emphasizes that the momentum created by various other stakeholders' efforts to promote diversity is something that needs to be taken into account by IPO candidates.
Financial Reporting: Going Concern Qualifications Hit a Record Low in 2020
According to this Audit Analytics report reviewing 21 years of "going concern" qualifications in public company audit reports, 2020 was a bit of a milestone year. Here's an excerpt from the report's intro:
The number of companies that received a going concern opinion during fiscal year (FY) 2020 declined to a record low of just 1,261. The percentage of companies that received a going concern opinion during FY2020 also declined to a record low of 17.9%. Going concern opinions have been declining since they peaked during FY2008 with 2,851 - during the height of the financial crisis. FY2008 also saw a high of 28.2% of companies receive a going concern opinion.
The gradual decline in going concern opinions since FY2008 had brought the percentage of companies that received a going concern opinion in line with pre-financial crisis figures. But the steepness of the FY2020 decline has brought all new lows. The decline was led by improvements from smaller and mid-size companies. Non-accelerated filers saw a 10.5 percentage point decline, and accelerated filers saw a 5.5 percentage point decline in the percentage of companies that received a going concern opinion during FY2020.
The report also addressed the reasons for going concern qualifications. Many reports listed multiple factors, but leading the pack was "recurring losses," which was cited in 71% of all 2020 going concern opinions. While that's down from its peak of 85% in 2018, the recurring losses issue was still cited twice as much as cash constraints, which were the second most frequently cited issue. The report notes that despite the SPAC boom, the percentage of reports citing no or limited operations as a reason for a going concern qualification declined over the past decade from 48% to 21%.
Latest Issue: "The Corporate Executive"
The January-February issue of The Corporate Executive has been sent to the printer (email firstname.lastname@example.org to subscribe to this essential resource). It's also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format - an option that many people are taking advantage of in the "remote work" environment. The issue includes articles on:
Latest Issue: "Deal Lawyers" Newsletter
The March - April issue of the Deal Lawyers print newsletter is now available. Topics include:
Remember that - as a "thank you" to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter - we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called "Back Issues" near the top of DealLawyers.com - 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com - and only one person subscribes to the print newsletter - everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
These newsletters are also viewable online by members of TheCorporateCounsel.net who subscribe to the electronic format - an option that many people are taking advantage of in the "remote work" environment.
What's New on Our Websites
Among other new additions, we have posted:
The following memos & insights:
- "IPOs, SPACs & Direct Listings - 2021 Milestones and 2022 Outlook" - Fenwick & West (3/22)
People: Who's Doing What & Where
Commissioner Allison Herren Lee Stepping Down: Commissioner Allison Herren Lee announced that she had notified President Biden that she intends to step down from the Commission once her successor has been confirmed. Lee's term as a Commissioner expires in June. As SEC Chair Gary Gensler pointed out in a statement, Commissioner Lee first joined the SEC's Division of Enforcement in the Denver Regional Office in 2005, and served as Counselor to former Commissioner Kara Stein and Senior Counsel in the Complex Financial Instruments Unit. Commissioner Lee served as Acting Chair in early 2021, taking an unusually active role in jumpstarting the SEC's efforts on climate change.
Yumi Narita Elected to CII Board of Directors: CII announced that Yumi Narita, executive director of corporate governance for the New York City Retirement System, was elected on March 7th as the newest member of CII's Board of Directors for 2022-2023. Narita takes the seat formerly held by Mansco Perry, who is retiring this year from his position as executive director and CIO of the Minnesota State Board of Investment.
Martha Legg Miller to Depart SEC: The SEC announced that Martha Legg Miller, the Director of its Office of the Advocate for Small Business Capital Formation (OASB), will leave the agency at the end of April. She's served as the OASB's Director since it was first established in 2018. The OASB's current Deputy Director, Sebastian Gomez Abero, will serve as Acting Director after Martha Legg Miller's departure.
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