TheCorporateCounsel.net

Monthly Archives: September 2020

September 25, 2020

BRT Says It Wants to Put a Price on Carbon…Over the Next 3 Decades

Last week, the Business Roundtable released these “Principles & Policies Addressing Climate Change” – a 16-page statement that declares the US should adopt a “market-based approach” to reduce emissions in line with the Paris Agreement. The BRT is careful to note that carbon should be priced only where it is environmentally and economically effective and administratively feasible, and in a way that continues to foster innovation & competitiveness. This Politico article summarizes the BRT’s positions. Here’s an excerpt:

A “market-based mechanism” is a broad term, and the Business Roundtable did not recommend any one particular design. It called for putting a price on carbon as a means to reduce emissions since “a clear price signal is the most important consideration for encouraging innovation, driving efficiency, and ensuring sustained environmental and economic effectiveness.”

Examples include direct taxation of carbon dioxide emissions as well as cap-and-trade schemes, such as legislation that passed the House in 2009 but fizzled in the Senate.

Any revenues that come from any market-based system should be used to support economic growth, reduce societal impact, and aid people and companies that are the most negatively affected, the goups said. And it should be linked with “at least a doubling of federal funding for research, development and demonstration of (greenhouse gas) reduction technologies.”

As this WaPo article notes, it’s looking like corporate interests may be more likely to claim a seat at the table the next time climate change legislation is considered, versus trying to kill those efforts outright, and that might help us all. However, the BRT’s principles envision reducing emissions by at least 80% from 2005 levels by 2050 and come at a time when the BRT is still drawing scrutiny of last year’s “stakeholder capitalism” pledge – the latest shot being this letter last week from Senator Elizabeth Warran (D-Mass.).

I suspect that a 30-year goal for reducing emissions is not what investors have in mind when they refer to “long-termism” – so if companies are hanging their hats on the BRT timeline, they probably also need to have some convincing talking points for engagements. As illustrated by this “open letter” issued last week by PRI, investors also continue to want companies to reflect climate-related risks in financial reporting.

Director Information Rights: The Latest “WeWork” Gift

We don’t get to blog much about The We Company since its IPO imploded, but their ongoing litigation recently brought us a nugget of corporate governance case law out of the Delaware Court of Chancery. In this opinion, Chancellor Bouchard decided as a matter of first impression that management cannot unilaterally preclude a director from obtaining the company’s privileged information.

The directors who were being kept in the dark here were members of a special committee formed last fall who were opposing the company’s motion to dismiss a complaint that the company filed in April against SoftBank, and they wanted privileged info that had been shared among company management, in-house counsel and outside counsel. The motion to dismiss was brought by a new committee consisting of two temporary directors, which was formed in May.

The info at issue isn’t the info that was shared between the new committee and its counsel, but between the company and its counsel – info about how the new committee was established, etc. Here’s the holding:

This decision holds, under basic principles of Delaware law, that directors of a Delaware corporation are presumptively entitled to obtain the corporation’s privileged information as a joint client of the corporation and any curtailment of that right cannot be imposed unilaterally by corporate management untethered from the oversight and ultimate authority of the corporation’s board of directors. Accordingly,the Special Committee is entitled to receive the privileged information of the Company it is has requested, which, to repeat, does not concern privileged communications between the New Committee and its own counsel.

This opinion is of interest because isolating director factions or underperforming directors through the use of special committees is one avenue that companies use to minimize those directors’ activities when they can’t otherwise be removed and won’t resign – but as this case emphasizes, director information rights must be honored. This blog from Frank Reynolds explains that there is a situation in which a board or committee can withhold privileged information – which exists when there’s sufficient adversity that the director could no longer have an expectation that they were a client of the board’s counsel. Here, the court found that management acted unilaterally – so the exception didn’t apply.

Venture Capital: New NVCA Forms Include Market Term Analysis

Here’s the intro from this Troutman Pepper memo (visit our “Venture Capital” Practice Area for more resources):

The National Venture Capital Association (NVCA) published on July 28, 2020 an updated suite of model venture capital financing documents that reflect the current events shaping the investment climate, and for the first time, embedded analysis of market terms directly in the NVCA’s model term sheet. Venture capital funds, professional investors, emerging companies and their respective advisors will benefit from the summary analysis contained in this article which highlights the most significant changes to the primary model financing documents.

The NVCA’s updates are timely because venture capital investing remains strong despite the challenges of 2020. Pitchbook reports 2,893 U.S. venture capital deals with an aggregate of $45.20B of capital raised as of the second quarter of 2020, representing approximately a 17% reduction in deal count and a 2% increase in aggregate dollars raised over the same period in 2019. Economic uncertainty looms in the market, as does the specter of increased governmental interest in foreign investments in certain emerging businesses.

Liz Dunshee

September 24, 2020

Shareholder Proposals: SEC Modernizes Rule 14a-8!

As we covered in real-time yesterday at our “Executive Compensation Conference,” (archives will be available soon – and you can still register for on-demand viewing of those), after a high-drama “pause” last week, the Rule 14a-8 amendments are finally here. The Commissioners voted 3-2 to adopt the amendments – which include the first revisions to the submission threshold in over 20 years, and the first revisions to the resubmission threshold since 1954. For companies that focus on keeping proposals out of the proxy statement (not all companies, but many!), this is a big deal. Here are the highlights from the SEC’s Fact Sheet:

Submission Thresholds – amend Rule 14a-8(b) by:

– Replacing the current ownership threshold, which requires holding at least $2,000 or 1% of a company’s securities for at least one year, with three alternative thresholds that will require a shareholder to demonstrate continuous ownership of at least:

– $2,000 of the company’s securities for at least three years;

– $15,000 of the company’s securities for at least two years; or

– $25,000 of the company’s securities for at least one year.

– Prohibiting the aggregation of holdings for purposes of satisfying the amended ownership thresholds;

– Requiring that a shareholder who elects to use a representative for the purpose of submitting a shareholder proposal provide documentation to make clear that the representative is authorized to act on the shareholder’s behalf and to provide a meaningful degree of assurance as to the shareholder’s identity, role and interest in a proposal that is submitted for inclusion in a company’s proxy statement; and

– Requiring that each shareholder state that he or she is able to meet with the company, either in person or via teleconference, no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal, and provide contact information as well as specific business days and times that the shareholder is available to discuss the proposal with the company.

Shareholder Representatives – amend Rule 14a-8(c) by:

– Applying the one-proposal rule to “each person” rather than “each shareholder” who submits a proposal, such that a shareholder-proponent will not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting. Likewise, a representative will not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative were to submit each proposal on behalf of different shareholders.

Resubmission Thresholds – amend Rule 14a-8(i)(12) by:

– Revising the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings from 3%, 6% and 10% for matters previously voted on once, twice or three or more times in the last five years, respectively, with thresholds of 5%, 15% and 25%, respectively. For example, a proposal would need to achieve support by at least 5% of the voting shareholders in its first submission in order to be eligible for resubmission in the following three years. Proposals submitted two and three times in the prior five years would need to achieve 15% and 25% support, respectively, in order to be eligible for resubmission in the following three years.

The amendments will be effective 60 days after publication in the Federal Register – but there’s an important transition period in that the final amendments will first apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022. The final rules also provide for a transition period with respect to the ownership thresholds that will allow shareholders meeting specified conditions to rely on the $2,000/one-year ownership threshold for proposals submitted for an annual or special meeting to be held prior to January 1, 2023.

We’ll be posting the inevitable flood of memos in our “Shareholder Proposals” Practice Area, and will continue to provide guidance on how practice evolves. One thing is already clear – investor groups aren’t happy. CII’s press release says that the amendments will “muzzle the voice of small investors” and lists several benefits of the current proposal process – asserting that it is a cost-effective way for shareholders to communicate with companies. ICCR’s press release takes it a step further, with this quote from Andy Behar of As You Sow:

“The SEC has intervened to disrupt a system that has worked with fairness and integrity for over 50 years,” said Andy Behar, CEO of As You Sow. “Companies have gained deep insight into potential material risks to their businesses, courtesy of their shareholder engagements. Investors have had a forum to raise their concerns, assisting companies to outperform. This is an ecosystem based on mutual respect and a common goal; helping companies be as good as they can be. The new SEC rules will not stop this relationship, they will simply force shareholders to escalate to litigation and other means. This will ultimately cost companies valuable time and resources.”

But Wait, There’s More! SEC Updates Whistleblower Awards Program

Yesterday, the SEC also tackled amendments to the rules governing its whistleblower program – another controversial proposal that was initially scheduled for a few weeks ago but postponed. The final amendments were adopted 3-2 and were accompanied by guidance from the SEC’s Office of the Whistleblower about the process for determining award amounts for eligible whistleblowers. This blog from Matt Kelly of Radical Compliance gives a good overview. Here’s an excerpt:

Among the changes: a presumption toward more generous awards at the lower end of the pay scale, restrictions on people who abuse the tipster process too often, and faster disposal of would-be tips that don’t meet the awards program criteria.

And the controversial idea to cap large awards at $30 million — technically killed, although the SEC’s two Democratic commissioners still objected that the agency could use other measures to achieve that same end of whittling down large awards.

See Matt’s blog and the SEC’s press release & fact sheet for more details. We’ll also be posting memos in our “Whistleblowers” Practice Area.

Industry Guide 3: Relocated & Amended!

A few years ago, Broc blogged about a “request for comment” on Guide 3 – the industry guide for banks and bank holding companies. That effort has now come to fruition as the SEC (unanimously!) adopted amendments on September 11th, which update & expand statistical disclosure requirements and move “Guide 3” requirements into Reg S-K. We’re posting memos in our “Financial Institutions” Practice Area.

Liz Dunshee

September 23, 2020

Today: “17th Annual Executive Compensation Conference”

Today is our “17th Annual Executive Compensation Conference” – Monday & Tuesday were our “Proxy Disclosure Conference.” For those who haven’t been attending the conferences – or for those who have and want to watch again – we ran a special tribute video yesterday to honor Marty Dunn. Marty was a legend in our community and is deeply missed.

You can still register online to get immediate access to these virtual events. Both conferences are paired together and they’ll also be archived for attendees until next August. That’s a huge value. Here’s more info:

How to Attend: Once you register, you’ll receive a Registration Confirmation email from mvp@markeys.com. Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.

How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on TheCorporateCounsel.net or CompensationStandards.com.

How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.

OTC: SEC Amends Information Requirements

Last week, the SEC closed the loop on a proposal from last year and adopted amendments to Rule 15c2-11 to modernize the type of information that needs to be available for broker-dealers to quote securities on the OTC markets. In keeping with the SEC’s current focus on outdated rules, this one was last amended about thirty years ago. Here’s an excerpt from the SEC’s fact sheet about the amendments (and here are statements from SEC Chair Jay Clayton & Commissioner Hester Peirce):

The amendments facilitate transparency of OTC issuer information by:

– Requiring to be current and publicly available certain specified documents and information regarding OTC issuers that a broker-dealer or qualified IDQS must obtain and review for the broker-dealer to commence a quoted market in an OTC issuer’s security (“information review requirement”);

The amendments provide greater investor protections when broker-dealers rely on the piggyback exception by:

– Providing a time-limited window of 18 months during which broker-dealers may quote the securities of “shell companies.”

The amendments reduce unnecessary burdens on broker-dealers by:

– Allowing broker-dealers to initiate a quoted market for a security if a qualified IDQS complies with the information review requirement and makes a publicly available determination of such compliance; and

– Providing new exceptions, without undermining the Rule’s important investor protections, for broker-dealers to:

– Quote actively traded securities of well-capitalized issuers;

– Quote securities issued in an underwritten offering if the broker-dealer is named as an underwriter in the registration statement or offering statement for the underwritten offering, and the broker-dealer that is the named underwriter quotes the security; and

– Rely on certain third-party publicly available determinations that the requirements of certain exceptions are met.

The rule will have a general compliance date that is 9 months after the effective date – and a compliance date that is 2 years after the effective date for the provisions that require a company’s financial info for the last 2 fiscal years to be current and publicly available.

How to Successfully Uplist

This blog from the Small Cap Institute points out that uplisting is a transformative event that is more than just a single transaction – it requires months of planning, and nearly perfect post-closing execution to assure investors that the company will be profitable investment. Here’s one tip for success:

Sell Stock to the Right Audience: Most companies that uplist have predominantly retail shareholder bases (i.e., their investors are mostly nonprofessional investors). Most companies that uplist also have stocks that trade less than $250,000 of stock per day. For reasons we cover in this piece about trading volume, most institutional investors are mathematically foreclosed from buying stocks that trade less than $250,000 per day, whether they like your company or not.

Unfortunately, due to either ignorance or disingenuous advice, myriad uplisted companies with daily trading volume less than $250,000 waste enormous amounts of time and money endlessly meeting around the country with institutional investors, who simply can’t buy their stock – and won’t.

Liz Dunshee

September 22, 2020

SPACs: New CDI Clarifies Form S-3 Eligibility

As John blogged last week on DealLawyers, SPACs have been having a “moment” due to this year’s market volatility. Yesterday afternoon, Corp Fin issued a new “Securities Act Forms” CDI #115.18 to address the Form S-3 eligibility of companies that go public via merger into a SPAC.

Question 115.18

Question: Following the merger of a private operating company or companies with or into a reporting shell company (for example, a special purpose acquisition company), may the resulting combined entity rely on the reporting shell company’s pre-combination reporting history to satisfy the eligibility requirements of Form S-3 during the 12 calendar months following the business combination?

Answer: If the registrant is a new entity following the business combination transaction with a shell company, the registrant would need 12 calendar months of Exchange Act reporting history following the business combination transaction in order to satisfy General Instruction I.A.3 before Form S-3 would become available. If the registrant is a “successor registrant,” General Instruction I.A.6(a) would not be available because the succession was not primarily for the purpose of changing the state of incorporation of the predecessor or forming a holding company. General Instruction I.A.6(b) also would not be available because the private operating company or companies would not have met the registrant requirements to use Form S-3 prior to the succession.

Where the registrant is not a new entity or a “successor registrant,” the combined entity would have less than 12 calendar months of post-combination Exchange Act reporting history. Form S-3 is premised on the widespread dissemination to the marketplace of an issuer’s Exchange Act reports over at least a 12-month period. Accordingly, in situations where the combined entity lacks a 12-month history of Exchange Act reporting, the staff is unlikely to be able to accelerate effectiveness under Section 8(a) of the Securities Act, which requires the staff, among other things, to give “due regard to the adequacy of the information respecting the issuer theretofore available to the public,…and to the public interest and the protection of investors.” [September 21, 2020]

Perks: New CDI Addresses COVID-19 “Benefits”

Yesterday, mere hours after Alan Dye & Mark Borges covered the complexities of evaluating “perks” in a COVID-19 environment at the first day of our “Proxy Disclosure Conference,” Corp Fin issued new “Regulation S-K” CDI #219.05:

219.05 In reporting compensation for periods affected by COVID-19, questions may arise whether benefits provided to executive officers because of the COVID-19 pandemic constitute perquisites or personal benefits for purposes of the disclosure required by Item 402(c)(2)(ix)(A) and determining which executive officers are “named executive officers” under Item 402(a)(3)(iii) and (iv). The two-step analysis articulated by the Commission in Release 33-8732A continues to apply when determining whether an item provided because of the COVID-19 pandemic constitutes a perquisite or personal benefit.

– An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties.

– Otherwise, an item that confers a direct or indirect benefit and that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, is a perquisite or personal benefit unless it is generally available on a non-discriminatory basis to all employees.

Whether an item is “integrally and directly related to the performance of the executive’s duties” depends on the particular facts. In some cases, an item considered a perquisite or personal benefit when provided in the past may not be considered as such when provided as a result of COVID-19. For example, enhanced technology needed to make the NEO’s home his or her primary workplace upon imposition of local stay-at-home orders would generally not be a perquisite or personal benefit because of the integral and direct relationship to the performance of the executive’s duties. On the other hand, items such as new health-related or personal transportation benefits provided to address new risks arising because of COVID-19, if they are not integrally and directly related to the performance of the executive’s duties, may be perquisites or personal benefits even if the company would not have provided the benefit but for the COVID-19 pandemic, unless they are generally available to all employees.

Today: “Proxy Disclosure Conference – Part 2”

Today is the second day of our “Proxy Disclosure Conference” – tomorrow is our “17th Annual Executive Compensation Conference.” You can still register online to get immediate access to these virtual events! Both conferences are paired together and they’ll also be archived for attendees until next August. That’s a huge value.

How to Attend: Once you register, you’ll receive a Registration Confirmation email from mvp@markeys.com. Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.

How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on TheCorporateCounsel.net or CompensationStandards.com.

How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.

Liz Dunshee

September 21, 2020

Today: “Proxy Disclosure Conference – Part 1”

Today and tomorrow is our “Proxy Disclosure Conference” – Wednesday is our “17th Annual Executive Compensation Conference.” Here are the agendas: 15 substantive panels over 3 days – plus 6 breakout roundtables today that you can choose from. Check out my promo video to see what’s in store! You can still register online to get immediate access to these virtual events! Both conferences are paired together and they’ll also be archived for attendees until next August. That’s a huge value.

How to Attend: Once you register, you’ll receive a Registration Confirmation email from mvp@markeys.com. Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.

How to Participate in a Roundtable: New this year, we have added interactive roundtables to discuss pressing topics! We hope you’ll join us for one of these half-hour breakout sessions. Space is limited for those, but you can save yourself a seat ahead of time by navigating to the agenda tab in the mvp platform and clicking on the seat icon next to the roundtable you want to attend.

How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on TheCorporateCounsel.net or CompensationStandards.com.

How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.

EU Considering Options for “Sustainable Corporate Governance”

The European Commission is studying the root causes of “short-termism” and wants to enact an EU-level solution that would make directors more accountable for companies meeting the UN Sustainable Development Goals and the goals of the Paris Agreement on climate change. The findings are summarized in this 185-page report – and it looks like one option that’s on the table is changing the formulation of director duties in EU nations. It characterizes these 7 areas as “key problem drivers” (also see this Wachtell memo):

1.Directors’ duties and company’s interest are interpreted narrowly and tend to favour the short-term maximisation of shareholder value

2.Growing pressures from investors with a short-term horizon contribute to increasing the boards’ focus on short-term financial returns to shareholders at the expense of long-term value creation

3.Companieslack a strategic perspective over sustainability and current practices fail to effectively identify and manage relevant sustainability risks and impacts

4.Board remuneration structures incentivize the focus on short-term shareholder value rather than long-term value creation for the company

5.The current board composition does not fully support a shift towards sustainability

6.Current corporate governance frameworks and practices do not sufficiently voice the long-term interests of stakeholders

7.Enforcement of the directors’ duty to act in the long-term interest of company is limited

B-Corps: Getting More Useful?

Last week, Veeva Systems – an NYSE-traded company with a $40B market cap – announced that it had formed a board committee to explore becoming a public benefit corporation – along with shedding its main anti-takeover provisions. That’s a pretty unique move for a company that’s not even consumer-facing, and if Veeva proceeds, they would join only three publicly traded companies incorporated under Delaware’s “public benefit corporation” statute – Laureate Education, Lemonade and Vital Farms.

Some are predicting that more might convert – or that we will see more public company subs going that route, as Danone North America and Proctor & Gamble’s “New Chapter” have done. This MoFo memo analyzes the three current public company PBCs, extracts some lessons, and explains the possible benefit:

An obligation to report on ESG considerations and risks is not the same as an obligation to pursue a public benefit potentially to the detriment of short-term stockholder value. Adopting a PBC form allows boards of directors and management to balance these considerations and make the choices they think are right, while having a defense from activist stockholders that may be off-put by a quarter or year of lower-than-hoped results. Because of this, PBCs have been touted as a potential solution both to the problem of short-termism in issuer and investor behaviors and to companies seeking to maximize profits for stockholders and passing associated negative externalities to the public at large.

Meanwhile, this Seyfarth memo notes some of the hurdles for public company PBCs – compared to the over 3,000 privately held companies have now gone through the B-Lab process to become Certified B-Corps. Here’s an excerpt:

Because of the need for, and cost associated with, a shareholder vote to reincorporate an entity, among other reasons, this can be a practical barrier to B Corp certification for public companies. Notwithstanding, B Corps are slowly making their way into the public company space – with Danone North America leading as the world’s largest B Corp. At this juncture, the few other public B Corps were certified before becoming public.

Demand for B-corps – although limited – may be helped along by Delaware’s recent amendments to its “public benefit corporation” statute – which make it easier to convert to that structure and afford more protections to PBC directors. As John recently blogged on The Mentor Blog, this Ropes & Gray memo takes a deep dive into the amendments. Here’s a summary:

Voting Thresholds for Opting In and Opting Out Lowered. The 2020 PBC amendments eliminated Section 363(a) and (c) – which had originally required 90% approval to convert in or out of PBC status. The result is that the voting thresholds for conversions, mergers and consolidations involving PBCs are now governed by Sections 242(b) and 251 of the DGCL, which provide for majority voting unless the certificate of incorporation provides otherwise.

Elimination of Statutory Appraisal Rights in Connection with PBC Conversions. The 2020 PBC amendments eliminated Section 363(b) – which had provided appraisal rights to stockholders who didn’t approve of a conversion to the PBC entity form. As a result, there no longer is a specific statutory appraisal right if a conventional corporation converts to a PBC. Appraisal rights in connection with PBC mergers and consolidations are now governed by Section 262 of the DGCL, which addresses appraisal rights in connection with mergers and consolidations more generally.

Director Protections Strengthened. As discussed above, under Section 365(a) of the DGCL, directors of a PBC must balance the pecuniary interest of stockholders, the interests of other stakeholders and the specific public benefit identified in the certificate of incorporation. Section 365(c) has been amended to clarify that a director’s ownership of stock or other interests in the PBC does not inherently create a conflict of interest, unless the ownership of the interests would create a conflict of interest in a conventional corporation.

In addition, the 2020 PBC amendments revised Section 365(c) to provide that any failure on a director’s part to satisfy Section 365(a)’s balancing requirement does not constitute an act or omission not in good faith or a breach of the duty of loyalty for purposes of Section 102(b)(7) (exculpation of directors) or Section 145 (indemnification) of the DGCL, unless the certificate of incorporation provides otherwise. Previously, this was framed as an opt-in in Section 365(c), rather than as an opt-out.

Ability to Bring Derivative Suit Brought into Alignment with Conventional Corporations. Amendments to Section 367 align the thresholds for PBC derivative actions with those applicable to conventional corporations.

Farewell to Justice Ruth Bader Ginsburg

Late Friday, the SEC Commissioners issued a joint statement on the passing of Justice Ruth Bader Ginsburg (here is her NYT obituary):

We join the nation in mourning the passing of Justice Ruth Bader Ginsburg. Justice Ginsburg’s powerful intellect and determination shaped decisions that had meaningful impacts for all Americans, including our nation’s investors. She inspired many, and her trailblazing career will serve as a model of public service and dedication to our country for generations to come.

Liz Dunshee

September 18, 2020

More on “Reg FD Gets a ‘Kodak Moment'”

It wasn’t too long ago when Liz blogged about the SEC investigating the circumstances around Eastman Kodak’s announcement of a $765 million government loan. Earlier this week, the company issued a press release with an 88-page report to the special committee of Kodak’s board that was formed to internally investigate those events.

The report was prepared by Akin Gump over the course of what sounds like around-the-clock work spanning 6 weeks, in which it reviewed over 60,000 documents that included data searches of mobile devices, emails and text messages. It concludes that the company, and its officers, directors and senior management didn’t violate securities regulations or other relevant laws, breach their fiduciary duties or violate any of the internal policies or procedures. Even so, the report contains several corporate governance and procedural recommendations.

The report’s Reg FD analysis begins at page 70 and concludes there was no violation – among other reasons, because the early disclosure to the media was inadvertent and followed by the company’s posting of a DFC press release within 24 hours. But when it comes to the process that Kodak followed with respect to the release of information related to the LOI before the official release of the DFC Announcement, the report acknowledges there was room for improvement – and identifies several deficiencies that other companies may want to consider for their own policies & processes. In particular, counsel to the special committee found that there was:

(1) a lack of training for Kodak personnel who were dealing with the media,

(2) a lack of clear policies and procedures regarding processes that must be followed before a press release or media advisory can be revised or circulated to parties outside of Kodak,

(3) a general lack of sensitivity among certain Kodak employees regarding the need to carefully control the release of potentially MNPI regarding Kodak due to its status as a publicly traded company, and

(4) a lack of robust coordination with the legal department regarding outreach to the media leading up to and after the DFC Announcement.

Among other recommendations, the report urges the company to review and update its policies and procedures regarding the release of potentially MNPI and ensure that its public relations department is properly staffed and trained with respect to the appropriate protocols and best practices for handling interactions with the media on behalf of a public company. It also recommends that management ensure that the legal department has sufficient and appropriate resources.

Several media outlets issued stories about the report’s findings – here are a few – FT, CNBC, TheStreet.

Compliance Program Survey: Prioritizing People Issues Can Improve Effectiveness

Back in June, I blogged about NAVEX Global’s benchmarking data for compliance hotlines.  For a more general look at compliance program benchmarking information, Navex issued a 72-page 2020 Definitive Risk & Compliance Benchmark Report based on a survey of over 1,400 risk and compliance professionals.  One of the survey’s takeaways is that many compliance programs could take measures to improve effectiveness by prioritizing people issues.  Here’s some of the survey’s high-level data points:

– How an organization’s senior leaders view its compliance function greatly impacts overall program performance as does the frequency with which compliance officers interact with the board

– Regulatory requirements primarily drive compliance program decisions but for programs looking to get better, emphasis should be on workplace culture, tone from the top and program automation as much or more than meeting legal requirements

– More than half of respondents said that their risk and compliance program periodically reports to the board and 9 out of 10 rated their board engagement as good or excellent

– With respect to training, 74% of organizations are investing in data privacy training and nearly one-half of respondents are planning on providing training on bribery, corruption, fraud and financial integrity in the next 2-3 years

In terms of disappointments, one finding was that although workplace culture is valued – 74% of respondents described ‘improving organizational culture’ as important, the issue ranked last when respondents prioritized their concerns. Along with culture, preventing and detecting retaliation ranked low among compliance program concerns even though it’s a top concern for both regulators and employees and the extent to which employees fear retaliation has consistently been a strong indicator of the health of an organization’s culture. The survey found only 39% of respondents labeled speaking up and fear of retaliation as top concerns and the number of respondents who intend on making retaliation prevention a priority in the coming year fell to 17%.

Questions for Boards to Keep Culture “Front & Center”

With actual time in the office still limited for many, a Deloitte/NACDonline memo reminds us of the importance of company culture as it can help ensure a company is able to respond to disruption while also supporting employees.  Now that it appears not everyone has company culture high on their priority list – and because of its importance generally – the memo says it’s equally important that the board stay on top of culture risk.  The memo suggests boards ask the following questions to help keep company culture “front and center:”

– Do we understand what culture is and why it’s important?  When culture is aligned to business strategy, employees will work to support business goals, which can lead to competitive advantage

– Do we agree that the cultural tone is set from the top?  HR is often charged with employing techniques to gauge culture while the executive team sets the ethical tenor for the company – boards should evaluate their executive team on culture, perhaps linking compensation or making it part of the succession process for executive leadership

– How do we know if our organization has a culture problem?  Directors can perform due diligence on management’s assertions about culture by asking questions and seeking validation through data – they can also ask whether their organization is using emerging techniques to help assess culture, such as risk-sensing technology and behavior analytic tools

– Have we made culture a regular item on our board and committee agendas?  Culture should be part of the board’s general risk oversight process – boards should move away from thinking of culture as a once-and-done exercise

– Lynn Jokela

September 17, 2020

Quest for Director Diversity Information

Given the sensitivity of the issue, some may be grappling with how to approach gathering director diversity information.  Investors are increasingly asking for board diversity disclosures, and earlier this week, ISS ESG announced that it’s including some director and NEO racial and ethnic diversity information in the proxy advisor’s data service offerings. A frequent suggestion heard at conferences is to add a question or two to the D&O questionnaire, which most know, isn’t as straightforward as it sounds.  A recent Bryan Cave blog discusses this conundrum.

For those that aren’t keen on including another question in the D&O questionnaire, the blog says boards could consider addressing self-identification disclosures during a board meeting or in private conversations, and documenting the results in an appropriate manner, although individual director consent would still be needed for disclosures.  For those that might update the D&O questionnaire, companies could socialize the topic before circulating an updated questionnaire so they can understand whether directors wish to proceed.  The blog includes this example of a possible D&O question:

‘If you are willing to provide this information, please self-identify up to three classifications of racial/ethnic/gender/other diversity characteristics. Please note that if you choose to provide this information, you consent to possible public disclosure of the information, including in the company’s proxy statement, on our website or in response to inquiries from analysts, shareholders or the media.’

Alternatively, a separate consent checkbox could be added to the D&O questionnaire if a company wants to include only the first sentence of the sample question in order to gather diversity data and instead give directors a separate option to self-identify without consenting to public disclosure.

Quick Poll: Gathering Board Diversity Information

Please participate in this anonymous poll:

survey services


September-October Issue: Deal Lawyers Print Newsletter

This September-October Issue of the Deal Lawyers print newsletter was just posted – & also mailed (try a no-risk trial). It includes articles on:

– The Road to Global Closing: Drafting Local Transfer Agreements in Cross-Border Carve-Outs

– Third Circuit Clarifies Requirements for Risk Factor Disclosures in Merger Proxies

– M&A Purchase Price Considerations in the Context of COVID-19

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 – 2nd 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.
– Lynn Jokela

September 16, 2020

Course Materials Now Available: Detailed Agendas & Talking Points!

As a “sneak peek” for our members who are attending our “Proxy Disclosure & Executive Pay Conferences” that are starting next Monday, September 21st, we have posted the “Course Materials” – 167 pages of practical nuggets.  For conference attendees who are not members, the materials will be posted later this week on our conference platform – so those folks can use the mvp@markeys.com registration email to access the platform and navigate to the “View Course Materials” link on the homepage.

With so many pandemic and rule-related developments this year, the Course Materials are better than ever before! We don’t serve typical conference fare (i.e. regurgitated memos and rule releases); our conference materials consist of originally crafted practical bullets & examples. Our expert speakers go the extra mile!

Here’s some other info:

– How to Attend: There’s still time to register for our pair of upcoming conferences, and once you do, you’ll receive a Registration Confirmation email from mvp@markeys.com. Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here are the agendas for all three days!  If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.

Register for a Roundtable: New this year, we have added interactive roundtables to discuss pressing topics! We hope you’ll join us for one of these half-hour breakout sessions – you can sign up here.

– How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on TheCorporateCounsel.net or CompensationStandards.com.

– How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.

Shareholder Proposal Rulemaking: SEC Open Meeting Postponed!

After blogging earlier this week about the SEC’s open meeting that had been scheduled for today when it would consider amendments to the shareholder proposal rules, late yesterday afternoon, the SEC issued a notice postponing the meeting.  Postponement is perhaps a small consolation for those hoping the meeting wouldn’t be cancelled.

The Commission will now consider amendments to the shareholder proposal rules at an open meeting calendared for September 23.  The notice says at the September 23 open meeting, the Commission will also consider whether to adopt amendments to the rules implementing its whistleblower program. It was just two weeks ago when the SEC cancelled its open meeting to consider amendments to the whistleblower program, which was the second time that rulemaking has been called off.  So, presuming the Commission holds the open meeting next Wednesday – and both items stay on the agenda – it could be a pretty significant rulemaking day for the SEC.

Financial Reporting: Looking Again at Effects of Covid-19

Financial reporting in 2020 has turned out to be more of a laborious exercise than most companies envisioned at this time last year. And, this Deloitte memo says that Covid-19’s ongoing impact isn’t making things any easier. The memo discusses some “top of mind” financial reporting and accounting issues that companies are dealing with as challenges resulting from the pandemic continue to evolve. Here’s an excerpt addressing accounting considerations for companies that may be thinking about optimizing their real estate footprint:

In connection with optimizing their real estate footprint on a go-forward basis, a number of companies are reevaluating their leases or lease portfolios. From an accounting standpoint, companies should consider whether a decision to no longer use a leased asset constitutes an abandonment of the asset. Accounting guidance generally requires a company to accelerate expense recognition for assets deemed “abandoned.” However, to be deemed abandoned, a company needs to assess whether it has the ability and would be willing to sublease the leased asset at any point during the remaining lease term. This may include considering the economic environment and the expected demand in the sublease market and will likely require a company to use more judgment when assessing longer remaining lease terms. The potential that a company would be willing to sublease an asset at any point in the future may preclude the company from considering an asset to be abandoned and thus preclude the acceleration of expense recognition.

Some of the other topics addressed in the memo include forecasting, non-GAAP disclosures, internal controls, stock compensation plans and awards, default risk on modified loans, goodwill impairment and modification of other contractual agreements.

– Lynn Jokela

September 15, 2020

Vanguard’s Expectations for Board Diversity

Following the killing of George Floyd, investors are increasingly calling for change and looking for company and board diversity data.  A few weeks ago, I blogged about State Street’s request for companies to disclose board and workforce racial diversity data and last week, Liz blogged on our “Proxy Season Blog” about Neuberger Berman’s willingness to use its proxy votes to push for diversity disclosure.  With all this recent news, some may have missed that last year, Vanguard spoke up on board diversity by detailing expectations about board diversity as part of its 2019 Investment Stewardship Report.

In that report, Vanguard explained that in addition to promoting board gender diversity, the asset manager is asking boards to seek greater diversity.  Here’s an excerpt and Vanguard’s list of expectations for public companies:

We have long believed in the importance of diversity in the boardroom, and we have increasingly advocated for greater representation of women on corporate boards. We are expanding our focus to more explicitly urge boards to seek greater diversity across a wide range of personal characteristics, such as gender, race, ethnicity, national origin, and age. Our board diversity expectations of public companies includes:

(1) Publish your perspectives on board diversity. Here’s what we ask companies: Does your board share its policies or perspectives on diversity? How do you approach board evolution? What steps do you take to get the widest range of perspectives and avoid groupthink? Vanguard and other investors want to know.

(2) Disclose your board diversity measures. We want companies to disclose the diversity makeup of their boards on dimensions such as gender, age, race, ethnicity, and national origin, at least on an aggregate basis.

(3) Broaden your search for director candidates. We encourage boards to look beyond traditional candidate pools—those with CEO-level experience— and purposely consider candidates who bring diverse perspectives into the boardroom.

(4) Make progress on this front. Vanguard expects companies to make significant progress on boardroom diversity across multiple dimensions and to prioritize adding diverse voices to their boards in the next few years.

Board Composition: Snapshot of Ethnic & Gender Diversity Data

With increased attention on board composition, just last week Russell Reynolds issued an updated report on ethnic & gender diversity for U.S. public company boards and it says that Black representation on S&P 500 boards was surprisingly low in 2019 – only 6% of S&P 500 directors were Black.  The report provides a snapshot of board ethnic and gender diversity data, including trends – helpful data to take a look at and have on hand, especially when directors ask about trends and benchmarks. Here’s a few high-level data points:

– Compared to data for S&P 500 directors, Fortune 100 and 500 boards had slightly higher percentages of Black directors – 11.1% and 8.6% respectively

– When looking at trend data, the report shows board gender diversity has improved significantly from 2010 to 2018 but over that same time span, there has been minimal movement in board ethnic diversity – for Fortune 500 companies, the percentage of women directors increased steadily from 16 to 23%, while the percentage of Black directors has hovered between 7 and 9%

– At the time of the report, there were 161 companies in the S&P 500 without any black directors and although that’s a high number, Russell Reynolds reports that compared to a mid-July 2020 study, that number has actually declined from 172 – a 6% improvement in just a couple of months

– Data from KPMG, Ascend and Pinnacle included in the report shows Asian director representation in the Fortune 100, 500 and 1000, the majority of which fail to include at least one Asian director – see this KPMG study about the prevalence of Asian directors on Fortune 1000 boards

$10 million Whistleblower Award!
Earlier this summer, John blogged about someone hitting the whistleblower jackpot and since then there have been several sizable awards. Now there’s another with the SEC issuing this press release announcing an award of more than $10 million, not quite as high as the earlier jackpot but it’s no small change – and it likely brightened the whistleblower’s day. Persistence has a way of paying off, here’s an excerpt from the SEC’s Order:

Claimant provided Enforcement staff with extensive and ongoing assistance during the course of the investigation, including identifying witnesses and helping staff understand complex fact patterns and issues related to the matters under investigation; the Commission used information Claimant provided to devise an investigative plan and to craft its initial document requests; and Claimant made persistent efforts to remedy the issues, while suffering hardships.

– Lynn Jokela

September 14, 2020

Shareholder Engagement: Effect of Proposed Amendments to Form 13F

Ever since the SEC proposed amendments to increase the Form 13F reporting thresholds, there has been ongoing commentary voicing concerns – here’s John’s blog about some of the ‘hot’ comment letters.  A recent MarketWatch opinion piece from Ethan Klingsberg and Elizabeth Bieber of Freshfields does a nice job explaining why, if adopted, the rules could ultimately make things more difficult for company directors – and we could add to that most everyone involved in shareholder engagement efforts.

The authors note how off-season shareholder engagement has evolved to become “de rigueur for public companies.”  During proxy season, asset managers and governance specialists are swamped and pressed for time, which as many corporate secretaries have learned, has made off-season shareholder engagement a priority.  As investors look to engage with companies and sometimes request executives and directors be part of those conversations, the authors acknowledge the development has been good for business.  Even though there are still periodic activist campaigns, the authors note that a spectrum of shareholders are engaging in constructive dialogue with companies and then explain what could happen if the proposed amendments are adopted:

But all of these positive developments hinge on one factor: knowing who your shareholders are. Right now, mega-shareholders (those owning more than 5% of the outstanding stock) make mandatory filings, but for many companies, there are large numbers of institutional shareholders under this threshold that boards want to take into account and to which they want to organize outreach.

The way that these shareholders are identified is by the quarterly filings on Form 13F.  The SEC has proposed to cut back the 13F filing requirement dramatically, with boards ceasing to have visibility on holdings by 4,500 institutional investment managers representing approximately $2.3 trillion in assets, according to one SEC commissioner.  Only the most proactively vocal shareholders and the largest shareholders will be visible to boards.

Today in response to 13F filings, companies are able to proactively reach out to shareholders to help educate shareholders and understand their views.  We should keep the board-shareholder dynamic healthy and constructive rather than impeding it by tearing down the 13F regime.

Comment Period on Shareholder Proposal Rules – Request to Re-Open It

With the SEC slated to consider amendments to the shareholder proposal rules on Wednesday and despite a deluge of comment letters, a coalition of shareholder rights advocates have requested the Commission re-open the comment period for the proposed rule amendments.  The crux of the request to re-open the comment period relates to previously undisclosed data used to estimate the impact of the proposed amendments, here’s an excerpt from the group’s letter:

We are troubled by the 11th-hour submission by the Chief Economist of the Commission’s Division of Economic and Risk Analysis (“DERA”), on August 14, long after the February 3, 2020, public comment deadline, of the staff’s analysis of previously undisclosed data that is material to the public’s understanding of their predicted impact. The August 14 DERA Memo indicates that the Commission has been in possession of the data since at least August 2019 and that DERA staff had used the data to estimate the impact of the proposed amendments before the Commission voted to propose them. Yet the data and the staff’s analysis were held back from the Release accompanying the proposed amendments and not released until the Commission announced that it is prepared to vote on final changes to Rule 14a-8, without an opportunity for public comment.

The letter elaborates and asserts that the fact that the data was withheld is a significant breach of the Commission’s Current Staff Guidance on Economic Analysis in SEC Rulemaking, which among other things requires that the economic analysis that accompanies a proposed rule provide a fair assessment of the predicted impact of a proposed rule, including costs and benefits, as well as that it ‘clearly address contrary data or predictions.’

The SEC recently cancelled an open meeting when it was scheduled to consider adopting amendments to its whistleblower program.  Even with periodic last-minute cancellation notices, with so much anticipation around the proposed amendments to the shareholder proposal rules, it would come as a bit of a surprise if Wednesday’s meeting was cancelled – we’ll see where this goes, stay tuned!

Tomorrow’s Webcast: “Non-GAAP Measures & Metrics: Where Are We Now?”

Tune in tomorrow for our webcast – “Non-GAAP Measures & Metrics: Where Are We Now?” – to hear Mark Kronforst of Ernst & Young, Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net and Lona Nallengara of Shearman & Sterling discuss non-GAAP disclosures that are back in the spotlight as companies grapple with how to quantify the effect of COVID-19 on their results of operations and the Corp Fin Staff continues its focus on individually tailored accounting principles and disclosure of key performance metrics.

– Lynn Jokela