July 8, 2020

Reg Flex Agenda: Universal Proxy Rules Coming Soon?

Just a couple of years ago, media reports suggested that the SEC’s universal proxy rule proposal was an “ex-parrot.”  But this Davis Polk blog says that latest edition of the agency’s Reg Flex Agenda includes the proposal on the short list, together with proxy plumbing. Here’s an excerpt:

Worth noting is that the potential rulemaking related to universal proxies, proxy process amendments (a.k.a. “proxy plumbing”) and mandated electronic filings have moved up to the short-term agenda; formerly these were on the 2019 fall long-term agenda. The universal proxy is a proxy voting method meant to simplify the proxy process in a contested election and increase, as much as possible, the voting flexibility that is currently only afforded to shareholders who attend the meeting. Shareholders attending a meeting can select a director regardless of the slate the director’s name comes from, either the company’s or activist’s. The universal proxy card gives shareholders, who vote by proxy, the same flexibility.

The proxy process topic is a very large-complicated topic that involves voting mechanics and technology, including issues such as those associated with the complex system of share ownership and intermediaries. As customary, the Reg Flex Agenda provides no details; however, given the complexity of the issues, it is most likely that “low hanging fruit” will be addressed. Some of these were identified by the SEC Investor Advisory Committee Recommendation issued in September 2019, which included the use of universal proxies and were previously discussed in our blog.

The Reg Flex Agenda targets an October 2020 date for the finalization of the rule.  However, the blog points out that an agency is not required to consider or act on any agenda item, and that SEC Reg Flex Agenda reflects solely the priorities of the Chairman and does not necessarily reflect the position of any other Commissioner.

ICFR: How Will Covid-19 Impact Material Weaknesses?

This FEI report on ICFR addresses the potential implications of the Covid-19 crisis on the assessment of whether material weaknesses in internal controls exist. Not surprisingly, this excerpt suggests that we’re likely to see more conclusions that material weaknesses exist than we have in recent years:

We’ll definitely see an increase in delayed filings and we’ll likely see an increase in material weakness disclosures. If remote work arrangements, facility closures or unavailability of key personnel due to illness result in an inability to apply or test control procedures, management may be forced to conclude that one or more material weaknesses in internal control exist, unless compensating preventive or detective controls are in place and able to be tested.

Satisfying the external auditors with sufficient evidence that controls are performing as intended could also be challenging in this environment. For example, people working remotely may not have access to typical work tools such as printers and scanners, making it difficult to evidence control performance.

The article also cautions that pandemic-related declines in earnings, revenues & other materiality benchmarks could also result in the inclusion of some items in the scope of this year’s internal control assessment that were excluded in prior years.

Listing Standards: NYSE Extends Temporary Shareholder Approval Relief

In April, the NYSE adopted a temporary rule easing the shareholder approval requirements applicable to listed companies looking to raise private capital during the Covid-19 crisis. That temporary rule was set to expire at the end of June, but due to the continuation of the Apocalypse, the NYSE opted to extend it through the end of September. Here’s the intro from this Mintz memo discussing the extension:

As discussed in our earlier Viewpoints advisory, the New York Stock Exchange temporarily allowed NYSE-listed companies to complete certain capital raising transactions involving related party issuances or the issuance of 20% or more of a company’s stock without shareholder approval under limited circumstances. As a result of the continuation of the coronavirus (“COVID-19”) pandemic, on July 2, 2020, the Securities and Exchange Commission approved an extension of the NYSE’s waiver of these shareholder approval rules in the circumstances discussed below through September 30, 2020.

John Jenkins