February 28, 2024

Nasdaq’s Board Diversity Rule: Rehearing Coming This Spring

When a 5th Circuit panel upheld Nasdaq’s “comply or disclose” board diversity rule last fall, John wrote at the time:

While the decision is a resounding win for Nasdaq and the SEC, it’s unlikely that this will be the last word on the case. As this Reuters article points out, the defendants drew a very favorable panel comprised entirely of Democratic appointed judges. If the plaintiffs appeal to the full 5th Circuit, the SEC & Nasdaq may well face a more hostile reception, because 12 of the 16 judges there were appointed by Republican presidents.

That appeal happened, and the petition for rehearing en banc was granted last week – with oral argument tentatively scheduled for mid-May. The October decision that had upheld the Nasdaq rule has been vacated. Here’s more from Cooley’s Cydney Posner:

The two questions identified in the petition for the Court’s en banc review were:

“(1) whether approval of the Rule and its compulsion of discrimination and controversial disclosure requirements are unconstitutional state action; and

(2) whether the Rule is justified under the Exchange Act on the sole basis that select financial activists want to encourage board selection based on race and sex.”

The petition contended that the listing rule violated the Equal Protection clause and, by compelling controversial disclosure, the First Amendment, citing the conflict minerals decision, Nat’l Ass’n of Mfrs. v. SEC. (See this PubCo post.) The petition also challenged the panel’s conclusion that no state action was involved, arguing that “requiring private parties to encourage discrimination that otherwise would not have occurred” is in effect, state action by the SEC. And the “unique relationship between the SEC and national stock exchanges like Nasdaq means exchange rules are subject to constitutional requirements, as well.”

Bloomberg has reported that the SEC plans to keep defending its approval of the Nasdaq rule and that it believes the October decision was correct. With the unfortunate politicization of rulemaking and judicial decisions, a lot of folks will assume that the judges’ political party will dictate the outcome here, and that the rehearing is “the beginning of the end” for this rule.

Liz Dunshee

February 28, 2024

Delaware Departures: “Entire Fairness” Applies to Reincorporation That Benefits Controller

Last week, Vice Chancellor Laster denied a motion to dismiss a lawsuit against the board and controlling stockholder of TripAdvisor, which challenged the board’s decision to reincorporate from Delaware to Nevada. A lot of corporate governance folks have been closely watching this case in light of recent public comments about moving out of the state. Delaware has long been known as the premier and most reliable place to incorporate a company, but lately there’s a view that it’s been too easy for plaintiffs to pursue claims for breaches of fiduciary duty.

In the 52-page opinion, VC Laster applied the “entire fairness” standard to this fact pattern, which involved a controlling stockholder. This Wilson Sonsini memo summarizes the background and key points from the decision:

The essence of the court’s determination was that the purpose of the reincorporation was to reduce stockholder litigation risks for its fiduciaries and that a reduction in the litigation rights of stockholders in a controlled company creates a non-ratable benefit for the controller. Accordingly, the standard of review governing the transaction is entire fairness unless the company uses some type of procedural protections, such as approval by an independent board committee and/or minority stockholders, to lower the standard of review by simulating an arm’s-length negotiation. Because no such steps were taken here, the court denied the defendants’ motion to dismiss and allowed the case to proceed under the entire fairness standard.

A management presentation and the proxy statement for the reincorporation proposal indicated that one purpose would be to provide greater liability protection for fiduciaries, based on a comparison of Nevada and Delaware law. According to the opinion, the disinterested stockholders didn’t seem to be on board:

At stockholder meetings in June 2023, holders of a majority of the voting power at each company approved each conversion. Assuming Holdings cast all of its votes in favor the Company conversion, only 5.4% of the unaffiliated Company stockholders voted in favor. Assuming Maffei cast all of his votes in favor of the Holdings conversion, only 30.4% of the unaffiliated Holdings stockholders voted in favor. Holdings and Maffei thus provided the decisive votes.

Tulane Law Prof Ann Lipton pointed out that the materiality of the litigation risk was an important part of the decision:

But here’s the thing. To get there, he had to distinguish some prior cases that concluded that the elimination of litigation rights did not state a claim for breach of fiduciary duty. This issue had come up, for example, in the context of charter amendments adding an exculpation clause under Section 102(b)(7), and in a reincorporation to California. VC Laster was pretty clear that he simply thought some of them were wrongly decided, but his main point was that in those cases, the amendments were immaterial – i.e., it was not clear that the change conferred a non-ratable benefit on existing directors. By contrast, he held, in this case, the differences between Nevada law and Delaware law are sufficiently plain – and the controller’s reasons for wanting the move sufficiently blatant – that the stockholder plaintiffs had at least, for pleading purposes, established they were losing a valuable right.

VC Laster was careful to note that the outcome resulted from this being a controller transaction. He called out that the decision would be different for a company without a controlling stockholder or for a company that had conditioned the transaction on procedural protections. In addition, he made a point of stating that if the plaintiffs are successful on the merits, the remedy would be damages based on the value of the stockholders’ “fundamental right” to litigate, rather than enjoining the move, which is what the plaintiffs had requested. So, companies are still free to leave Delaware – they just might have to pay their stockholders to do so, if there are conflicts and the transaction isn’t “cleansed” or entirely fair. Here’s an excerpt from the opinion about how that award could be calculated:

The Company’s stock has a trading price. In the conversion, nothing will change except the Company’s corporate domicile. Maffei’s control will remain constant. The Company’s business will remain constant. The only independent variable is the law governing its internal affairs.

Given that set-up, the change in the Company’s trading price should help quantify the harm, if any, caused by the conversion. As long as the market for the Company’s common stock is semi-strong-form efficient, then the price reaction should be indicative. Note that the stock price need not fairly approximate a pro rata share of the Company’s intrinsic value for the price reaction to matter. As long as any pricing disconnects remains consistent across variables other than the governing law, the price impact should provide insight.

Where do we go from here? The analysis in this opinion is relevant for moves to any other state, not just Nevada. That means that you can’t give short shrift to the process for approving reincorporation decisions – particularly if a controlling stockholder is involved.

Liz Dunshee

February 28, 2024

Transcript: Our 2024 “Activist Profiles & Playbooks” Webcast

We’ve posted the transcript for our latest “Activist Profiles & Playbooks” webcast.  Our panelists — Juan Bonifacino of Spotlight Advisors, Anne Chapman of Joele Frank, Sydney Isaacs of H/Advisors Abernathy and Geoffrey Weinberg of Morrow Sodali — discussed lessons from 2023, the evolution of activist strategies, UPC, what to expect from activists in 2024 and how to prepare.

Here’s a snippet of Juan’s comments on the flip side of UPC for activists:

It may be harder for dissidents to get larger slates elected because each candidate needs to be differentiated. Before, an activist could put up a slate of four or five people and because someone’s voting on your card, that ends up depriving the management slate from getting votes. Now people are saying, “Why did you nominate three instead of two? What does this third person add?”

In terms of whether that’s a higher bar, it requires a more nuanced argument that the dissident needs to make to say, “This solution to this problem I’ve identified needs these three people and this is why” in a way that maybe wasn’t as central historically. It was getting there, if you look over the last 10 years, but again, universal proxy accelerates that trend.

Members of this site or of can access the transcript of this program. If you are not a member, email to sign up today and get access to the full transcript – or sign up online.

Liz Dunshee

February 27, 2024

Proxy Advisor Regulation: Court Vacates “Solicitation” Def’n & Says 2022 Rollback Didn’t Go Far Enough

A federal district court has ruled in favor of ISS in its lawsuit challenging the SEC’s 2020 rule that would have subjected proxy advisors to enhanced regulations by saying they engage in the “solicitation” of proxies. Bloomberg reported on the decision, and summarized it as follows:

The Securities and Exchange Commission “acted contrary to law and in excess of statutory authority when it amended the proxy rules’ definition of ‘solicit’ and ‘solicitation’ to include proxy voting advice for a fee,” Judge Amit P. Mehta said Feb. 23 for the US District Court for the District of Columbia. A 2022 SEC repeal of some proxy firm requirements under the rule was insufficient, he said.

It would be a vast understatement to say that proxy voting advice is a complex topic with longstanding issues (and some “bad blood”). The case that ISS just won relates all the way back to a suit that it first filed in response to Commission-level guidance that was issued in 2019, and that continued when the SEC adopted rules in 2020. Those multi-part rules would have required proxy advisors to make extra disclosures and allow companies to respond to their voting recommendations. The 2020 rules were celebrated by companies, which is why the SEC didn’t make many friends when it tried to repeal some of them in 2022. That partial repeal also obviously didn’t win over ISS, which continued with this lawsuit.

As noted by Bloomberg, ISS’s victory is disappointing news to companies and trade organizations – which are in the midst of their own challenges to the Commission’s 2022 repeal that is mentioned above. They want the 2020 rule that just got vacated to be fully back in place and are fighting that out in federal appeals courts.

The court opinion is a real treat for securities law history buffs, walking through the regulation of proxy solicitations from 1956 forward. Here’s how it describes some of the many “twists & turns” that led to the SEC getting sued by both sides:

In November 2021, the SEC announced that it had concluded its review of the Final Rule. It proposed rescinding two of the three new conditions that, if satisfied, would exempt proxy voting advice from Rule 14(a) ‘s information and filing requirements. Proxy Voting Advice, 86 Fed. Reg. 67383 , 67387 (Nov. 26, 2021). Specifically, the SEC proposed eliminating the requirements that proxy advisory firms disclose their advice to corporate issuers and provide their clients with the issuers’ responses. Id. at 67388. The conflict-of-interests disclosure condition would remain, however. Id. The agency also proposed removing the Note amendment to the anti-fraud provision, Rule 14a-9 . Id. at 67390.

Importantly, the agency did not change its position that proxy voting advice for a fee constituted “solicitation,” and it therefore left that definitional amendment unchanged. Id. at 67384. In light of ongoing rulemaking, and at the parties’ request, the court agreed to continue to hold the case “in abeyance until the earlier of March 31, 2022, or the promulgation of final rule amendments addressing proxy voting advice.” Order Granting Defs.’ Mot. to Continue Abeyance, ECF No. 58.

By the end of March 2022, the agency had not yet completed the rulemaking process and again sought to continue this matter. [*8] Defs.’ Status Report and Mot. to Continue Abeyance, ECF No. 61. This time, however, Plaintiff opposed the agency’s request. Pl.’s Opp’n to Defs.’ Mot. to Continue Abeyance, ECF No. 62. The court agreed with Plaintiff, ruling that because the SEC had not proposed to withdraw proxy voting advice from the amended definition of “solicit” and “solicitation,” the case should move forward as to the claims challenging the definitional amendment. Minute Order, Apr. 17, 2022.

On July 13, 2022, the Commission adopted a final rule that rescinded the two conditions the agency had proposed to excise in November 2021. Proxy Voting Advice, 87 Fed. Reg. 43168 (July 19, 2022) (“Amended Final Rule”). The Amended Final Rule rendered moot Count V of the Amended Complaint (the First Amendment claim) and Count III of the Amended Complaint (the Proxy Guidance challenge) to the extent those claims covered the rescinded provisions.

The opinion goes on to devote many paragraphs to the meaning of the word “solicit” – sidestepping the current Chevron debate. Here’s the conclusion:

In sum, the court holds, at Chevron step one, the ordinary meaning of “solicit” at the time of Section 14(a) ‘s enactment does not reach proxy voting advice for a fee. Nor does the Exchange Act ‘s history and purpose support the SEC’s reading. The court therefore has no cause to move to Chevron step two and afford deference to the agency’s position.

By defining the terms “solicit” and “solicitation” in the proxy rules to include proxy voting advice for a fee, see 17 C.F.R. § 240.14a-1(l)(1)(iii)(A) , the SEC acted contrary to law and in excess of statutory authority, [*21] 5 U.S.C. § 706(2)(A) , (C) . Accordingly, the court grants summary judgment in favor of Plaintiff as to Counts I and II, denies the SEC’s and NAM’s cross-motions, and vacates the definitional amendment codified at 17 C.F.R. § 240.14a-1(l)(1)(iii)(A) . See 5 U.S.C. § 706(2)(C) (stating that courts must “set aside agency action” if found to be “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right”).

The National Association of Manufacturers is considering an appeal of this decision. In the absence of a higher-level authority stepping in, it will be quite the puzzle during proxy season if one circuit says that the SEC had no business regulating proxy advisors and another circuit ends up saying that those same rules need to get reinstated.

Liz Dunshee

February 27, 2024

PCAOB’s “NOCLAR” Proposal: Comment Period Reopened

Yesterday, the PCAOB announced that it will hold a virtual roundtable about its hotly contested proposal to enhance auditor responsibility for considering non-compliance with laws and regulations. The roundtable is next Wednesday, March 6th, at 9:30 a.m. Eastern.

In light of the roundtable, the PCAOB has also reopened the comment period for this proposal – until Monday, March 18th. The previous comment period closed last August. There was no shortage of feedback. All of the letters are available on the PCAOB’s website – and Meredith most recently shared notable themes a few months ago.

The PCAOB has a list of topics that it is considering more closely. Here’s more detail:

The roundtable will include three panels focused on the proposal’s requirements relating to auditors’ identification of laws and regulations and assessment of those laws and regulations, as well as costs and benefits of the proposal.

A briefing paper on the roundtable includes specific questions to be discussed and additional background.

Commenters are encouraged to specifically consider the questions and topics included in the roundtable briefing paper, and commenters are welcome to address any aspect of the proposal. Commenters are asked to provide reasoning and relevant data supporting their views.

Check out their announcement for instructions on joining the roundtable.

Liz Dunshee

February 27, 2024

Timely Takes Podcast: J.T. Ho’s Latest “Fast Five”

Check out John’s latest “Timely Takes” Podcast featuring Orrick’s J.T. Ho & his monthly update on securities & governance developments. In this installment, J.T. reviews:

1. Trends in Advance Notice Bylaw Litigation

2. Contested Election Comment Letter Trends

3. Technical Amendments to Corp Fin’s Confidential Treatment Application Guidance

4. Pay versus Performance Update for 2024

5. Tornetta v. Musk Decision

As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email John and/or Meredith at or

Liz Dunshee

February 26, 2024

SEC Climate Rules: Rumors Abound!

The rumor mill cranked into high gear last week for the SEC’s final climate disclosure rule – with many outlets – including Politico and Forbes – reporting that the final rules are being internally circulated. Here’s an excerpt from the Forbes article:

According to Declan Harty of Politico, the final draft of the proposal is currently being circulated to commissioners for their consideration. If his sources are correct, this indicates that a vote will take place during the first quarter, probably sometime in March.

A rule adopted in 2024 will go into effect in 2026, which aligns with other global developments in this area including the European Union’s European Sustainability Reporting Standards. Domestically, California is developing their own reporting standards utilizing the same timeline.

However, the passage by the SEC will not be the final word in this development. Expect the Republican controlled House of Representatives to utilize their oversight authority to revoke the rule. The timing of that action will most likely be tied to the 2024 elections, and the likelihood that Republicans maintain control of Congress and gain control of the White House. With the rule not going into effect for almost two years, Congress can wait until after the election to override the rule. If they act now, President Biden will most likely veto, as he did when Congress overrode the Department of Labor rule allowing ESG considerations in retirement plans.

The article notes that we can also expect legal challenges if and when the rule is adopted. The Commission is well aware of that and will be working to ensure that the final release can be solidly defended against those attacks.

So far, the SEC hasn’t announced an open meeting to vote on this matter – but a lot of folks are sure to be watching for an announcement. Many had already been wagering on early March due to the Congressional Review Act and the SEC’s Reg Flex Agenda. But keep in mind that there could still be a lot to do behind the scenes even after a draft rule is circulated. When it comes to specific timing, we won’t know until we know!

Liz Dunshee

February 26, 2024

SEC Climate Rules: Farewell to “Scope 3” Requirement?

Among the reports circulating last week about the SEC’s climate disclosure rule were a few – e.g., from Reuters and the WSJ – that the draft that is being internally circulated does not include a reporting requirement for Scope 3 emissions.

Eliminating the proposed “Scope 3” disclosure requirement would not be too surprising based on the comments that emphasized what a heavy lift this would be for private companies in the supply chain, the questions on whether there are reliable ways to collect & calculate these emissions, and the signals that major asset managers have been sending since the time the rules were proposed. But at many companies, “Scope 3” is the biggest part of their emissions. So, dropping that aspect of the rule would make a big difference in what’s reported – at least, in the US. Here’s more detail from Reuters:

If adopted, the new draft would represent a win for many corporations and their trade groups that lobbied to water down the rules. But it would also deviate from European Union rules which make Scope 3 disclosures mandatory for large companies starting this year and potentially complicate compliance for some global corporations.

The SEC’s original draft proposed mandatory disclosure of emissions for which companies are more directly responsible, dubbed Scope 1 and Scope 2. Some lobbyists pushed the SEC to require such disclosures only if they are material to a company’s business. Reuters could not ascertain whether the latest draft changed the Scope 1 and 2 requirement threshold.

See this blog from Cooley’s Cydney Posner for more detail on the back & forth on Scope 3. Stay tuned!

Liz Dunshee

February 26, 2024

SPAC Rules: Compliance Date Set for July 1st

The SEC’s final rules on SPACs (and de-SPACs) – which were adopted almost exactly a month ago – have been published in the Federal Register. That means that the compliance date for most of the rules is July 1st of this year, and the compliance date for iXBRL tagging is June 30, 2025. The final rules will require additional disclosures in SPAC IPOs and de-SPAC transactions and heighten liability risks for those involved.

Of course, the rule also included guidance on “investment company” status, which is already in play. As I blogged last month, that aspect of the release – and the part about projections – is something that all companies should care about.

Liz Dunshee

February 23, 2024

Shadow Insider Trading Back in the Spotlight

The SEC’s novel shadow insider trading theory is back in the spotlight again thanks to an article appearing in the Wall Street Journal earlier this week. The SEC’s case is going to trial next month, which will test the SEC’s theory that an individual can commit an insider trading violation when trading in the stock of an unrelated company based on material nonpublic information that the individual has about his or her own company. The article notes:

No court has ever tackled the idea that executives can go too far when they deploy their specialized knowledge or expertise to trade in the shares of rivals, said Karen Woody, a professor at the Washington and Lee University School of Law.

“I do think this is a push of the law and they are seeing if they can get a court to bless what is a bit of a stretch of the existing parameters,” Woody said of the SEC’s case.

The SEC says two facts about Panuwat’s trading show it was illegal. First, his employer, Medivation, had a policy that forbade trading other companies’ shares when employees had material nonpublic information about Medivation. And second, Panuwat traded on his work computer just seven minutes after he allegedly learned that Pfizer would buy his company.

The press attention to the case has prompted questions again as to what changes should be made to insider trading policies as a result of the SEC’s shadow insider trading case.

The panel that I moderated at the Northwestern Pritzker School of Law’s Securities Regulation Institute last month delved into this topic in some depth, and I was surprised to learn that a significant number of companies that were the subject of a recent academic study had very broad language in their insider trading policies that prohibited trading in other companies’ securities based on material nonpublic information, rather than more targeted language that prohibited trading in the securities of other companies with which the employer did business or was negotiating a potential transaction. Those companies that have the very broad formulation in their insider trading policies should revisit those policies to tighten up the prohibited conduct, so as not to create duties for employees that could potentially be seen as breached under the shadow insider trading concept. Here is our coverage of the topic from the January-February 2023 issue of The Corporate Counsel:

The SEC has been pushing the envelope on quite a few things these days, and one of those areas is with insider trading law. Back in January 2022, a federal district court denied a motion to dismiss a novel insider trading enforcement action brought by the SEC based upon a theory now known as “shadow insider trading.” In SEC v. Panuwat, No. 4:21-cv-06322 (N.D. Cal. Aug. 17, 2021), the SEC took the position that the insider trading laws apply where an insider uses material nonpublic information about his or her own company to trade securities of another company, such as a competitor or peer company in the same industry.

As noted in the court’s decision, the defendent, Panuwat, had a role at his company that included following the stock prices of certain peer companies. Shortly after receiving an internal email stating that his company would be acquired, Panuwat bought short-term out-of-the-money options of one of his company’s peers. Shortly after the acquisition of Panuwat’s company was announced, the stock price of the peer company increased, and Panuwat made more than $100,000 in profits from the options trade. The SEC alleged that Panuwat’s conduct constituted insider trading.

In the decision, the court’s determination of whether the SEC adequately alleged that Panuwat had breached his duty to his employer turned entirely upon the broad wording of his employer’s insider trading policy. The court did not consider whether Panuwat’s conduct would have been unlawful absent the written insider trading policy that prohibited it. The court concluded that the company’s insider trading policy, which prohibited employees from using the company’s confidential information to trade in the securities of “another publicly traded company,” was broad enough to prohibit trading in the securities of any public company based upon the company’s confidential information.

While it is hard to say how far the SEC’s shadow insider trading theory will go, the Panuwat case highlights a need to avoid overbroad language in the insider trading policy that could potentially broaden the scope of liability for those who are subject to the policy. With that in mind, we have revised the language in the Model Insider Trading Policy regarding trading of securities of other companies while aware of material nonpublic information to be more specific as to the relationship with those companies and how the information is obtained by the individual in the course of their work for their employer.

In our model insider trading policy materials that were included as a special supplement to the January-February 2023 issue, we tightened up the language on this topic to now read:

In addition, it is the policy of the Company that no director, officer or other employee of the Company (or any other person designated as subject to this Policy) who, in the course of working for the Company, learns of material nonpublic information about a company (1) with which the Company does business, such as the Company’s distributors, vendors, customers and suppliers, or (2) that is involved in a potential transaction or business relationship with Company, may engage in transactions in that company’s securities until the information becomes public or is no longer material.

It will be interesting to see how this first shadow insider trading case goes at trial, but even if the SEC does not prevail in the litigation, I think it makes sense to adopt the more specific policy language identified above.

– Dave Lynn