Shareholder proposals relating to the environment had a big year during the 2021 proxy season. As noted in D.F. King’s Proxy Season Review and Fall Engagement Guide, nearly half of all environmental proposals that made it onto ballots this year received majority shareholder support, compared to none just two years ago. Requests for climate change reporting received the highest number of submissions, as well as the highest number of proposals in this category that received majority shareholder support, followed by proposals requesting reporting or targets for GHG emissions. 80% of the GHG emissions-related proposals that made it onto ballots received majority shareholder support this year.
The breakout star of environment proposals in 2021 was the Say-on-Climate proposal. This proposal requested an annual advisory vote on a company’s climate-related plans. One say-on-climate proposal received majority shareholder support. The proposals received a lot of attention in 2021 and, as a result, they are likely to be featured in future shareholder proposal campaigns. This raises the inevitable comparison, could Say-on-Climate evolve into a universal requirement like Say-on-Pay?
It is easy to forget that, prior to the enactment of the Dodd-Frank Act’s Say-on-Pay requirement in 2010, the concept of getting an annual advisory vote on executive compensation had started in the United States as a shareholder proposal campaign. Following the lead of the Say-on-Pay votes that had been instituted in the United Kingdom and some other jurisdictions, shareholder proponents begin submitting Say-on-Pay resolutions to U.S. public companies in 2007, as concerns about excessive executive compensation reached their peak and new SEC rules went into effect requiring more comprehensive disclosure about executive compensation. By 2009, in response to the financial crisis, Congress picked up the baton and mandated Say-on-Pay votes for certain financial institutions, and the broader Say-on-Pay mandate took hold when the Dodd-Frank Act came together one year later.
One of the things that clearly facilitated the rise of Say-on-Pay proposals was the 2006 executive compensation disclosure rule changes, which established CD&A and more detailed compensation disclosures. By comparison, we could see how Say-on-Climate proposals could benefit from SEC-mandated disclosures on climate change risks, which we are expecting to see from the SEC in the near future.
While it is too soon to tell what path Say-on-Climate proposals are on, companies should be monitoring their progress and considering their ultimate impact, much like we did with Say-on-Pay proposals back in the 2000s.
Earlier this week, the SEC announced that it had barred two individuals from the whistleblower award program. According to the SEC, each of these individuals filed hundreds of frivolous award applications.
These bars were issued pursuant to the 2020 amendments to the SEC’s whistleblower program rules. New Exchange Act Rule 21F-8(e) authorizes the Commission to permanently bar a claimant from the Whistleblower Program based on submissions or applications that are frivolous or fraudulent, or that otherwise hinder the effective and efficient operation of the Whistleblower Program. The SEC’s adopting release for this rule defines “frivolous claims” as “those that lack any reasonable or plausible connection to the covered or related action.”
These bars are permanent, applying to any pending applications from the claimant at any stage of the claims review process as well as to all future award claims.
At the Small Business Capital Formation Advisory Committee meeting earlier this week, SEC Chair Gary Gensler focused his remarks on SPACs. He noted concerns about the PIPE investors getting a better deal than retail investors, as well as the costs associated with SPACs, including sponsor fees, dilution from the PIPE investors, and fees for investment banks or financial advisers. Gensler reiterated that he has asked the staff “for recommendations about how we might update our rules so that investors are better informed about the fees, costs, and conflicts that may exist with SPACs.”
It is good to know that, with major issues looming such as a government shutdown and the need to extend the debt ceiling, some of our representatives in Congress are focused on pieces of legislation like the Mind Your Own Business Act of 2021. Senator Marco Rubio announced that he had introduced this legislation last week, with the purpose of enabling shareholders to hold “woke” corporations accountable. The announcement states:
Specifically, the legislation would require corporate directors to prove their “woke” corporate actions were in their shareholders’ best interest in order to avoid liability for breach of fiduciary duty in shareholder litigation over corporate actions relating to certain social policies. It would also incentivize corporate management to stop abusing their positions to advance left-wing social policies by increasing their personal liability to shareholders for breaches of fiduciary duty resulting from those policies.
The provisions of the legislation include the following:
Requiring large public companies listing on national stock exchanges to provide shareholders with significant holdings with certain privileges with respect to claims for breach of fiduciary duty under covered circumstances, including if a company takes an action on a primarily non-pecuniary basis in response to State law, boycotts a class of persons or industry on a primarily non-pecuniary basis, or uses primarily non-pecuniary public reasoning for an action.
Corporate defendants would be bound by presumptions that pecuniary interest does not include common defenses used to defend exercises of business judgment, including the media image of the company or employee morale.
For claims of breach of fiduciary duty against management brought by shareholders under these covered circumstances, management would have the burden of proof and, if found in breach of their duties, be liable without indemnification by the company for a minimum amount of damages and attorney’s fees.
We will monitor the progress of this legislation, but my guess is that, in the current political environment, this one might be singing “I’m just a bill/Yes, I’m only a bill/And I’m sitting here on Capitol Hill.”
The SEC announced that John Coates, who served as Acting Director of the Division of Corporation Finance and then as Acting SEC General Counsel, will leave the SEC in October to return to teaching at Harvard University. Dan Berkovitz, who now serves as a Commissioner of the CFTC, has been named SEC General Counsel. Michael Conley, currently the SEC’s Solicitor, will serve as Acting General Counsel until Berkovitz joins the agency. As noted in the SEC’s announcement, SEC Chair Gary Gensler and Berkovitz previously worked together when Berkovitz served as the CFTC’s General Counsel from 2009 to 2013.
I look forward to participating in our upcoming conferences on October 13-15. I will be speaking with Renee Jones, the Director of the Division of Corporation Finance, on October 14th about all of the things that are happening in the Division right now, and then I will be joining the “SEC All-Stars” on October 14th and 15th to cover proxy season highlights and executive pay nuggets. With so much going on in the world of public company disclosure and corporate governance right now, I encourage you to sign up for these important conferences if you have not done so already!
This is a big week in Washington, as Congress works through a number of significant pieces of legislation, including funding the government for fiscal 2022 (the government fiscal year ends on Thursday). With all of the partisan fighting going on, we find ourselves hearing yet again about the threat of a potential government shutdown. So we must ask ourselves — what could a government shutdown mean for the SEC this time around?
A few weeks after I joined Corp Fin back in 1995, there was talk of a government shutdown and we sat through a flurry of internal meetings explaining what might happen if the agency did actually have to shut down. Having only worked in the private sector before coming to the SEC, I recall thinking “what did I get myself into?” Thankfully, the partial government shutdown that ensued for 21 days back then did not impact the SEC’s operations – the agency found money from somewhere, and was able to continue normal operations. Government shutdowns that have happened since then generally followed that same pattern, where part of the government shut down but the SEC kept going. That was of course until the end of December 2018, when we saw the SEC’s operations were almost completely curtailed for almost a month until the shutdown ended on January 25, 2019.
Something that the 2018-2019 shutdown taught us is that you cannot count on the SEC’s ability to find “emergency” appropriations to keep the lights on, so be prepared for when the inevitable “real” shutdown happens. With each successive shutdown, we get more guidance from Corp Fin and we all develop more experience dealing with the consequences. During the prolonged shutdown in 2019, we dealt with some very knotty issues, such as dealing with pending registration statements (e.g., considering whether to remove the delaying amendment) and shareholder proposal no-action requests (e.g., considering whether to exclude a proposal without a Staff response). Given the present uncertainty, now may be a good time to take a look at the coverage of the Staff’s shutdown guidance from early 2019, and plan accordingly. If you have a registration statement pending with Corp Fin or are otherwise awaiting action from the Staff on some matter, reach out to your contact now so you can get a sense of the Staff’s timing. Also, begin making contingency plans, just in case a shutdown happens (and drags on more than a few days).
The SEC announced that Erik Gerding has been named Deputy Director, Legal and Regulatory Policy, for the Division of Corporation Finance, effective October 4, 2021. Prior to joining the SEC, he has been a Professor of Law and a Wolf-Nichol Fellow at the University of Colorado Law School. Professor Gerding’s areas of focus have been corporate and securities law and financial regulation. He previously taught at the University of New Mexico School of Law and practiced in the New York and Washington, D.C., offices of Cleary Gottlieb Steen & Hamilton LLP.
Yesterday, the SEC announced that it had delivered its obligatory report to Congress regarding the proceedings of the agency’s 40th Annual Small Business Forum, which took place back in May. The Annual Small Business Forum is led by SEC’s Office of the Advocate for Small Business Capital Formation and typically involves the Commissioners and representatives of other SEC Divisions and Offices. The report to Congress describes the event in detail and publishes policy recommendations from the event, along with public comment on those recommendations. The twenty policy recommendations are grouped in four topic areas: finding your first dollars, doing your diligence, diversifying capital allocators and small cap insights.
Earlier this month, I blogged about falling off of the Rule 15c2-11 cliff when changes to the rule go into effect tomorrow. Rule 15c2-11 specifies the information that brokers must have to initiate or maintain quotations in OTC securities. While much of the focus has been on the impact of the rule changes on the quotation of equity securities of smaller issuers in the OTC markets (i.e., the cessation of quotations for a large number of issuers who are not able or willing to provide the required public information), Rule 15c2-11 applies to the quotation of fixed income securities, except for exempt securities such as U.S. treasury securities and municipal securities, which are specifically exempted from Rule 15c2-11.
On Friday, the Staff of the SEC’s Division of Trading and Markets issued a no-action letter to FINRA stating that the Staff would not recommend enforcement action until January 3, 2022 for quotations published by broker-dealers for fixed income securities in order to “allow for an orderly and good faith transition into compliance with the Amended Rule.” The no-action letter indicates that it was issued in response to “requests from industry representatives that have indicated through telephonic meetings with Commission staff that they may be unable to complete, by the compliance date of September 28, 2021, the operational and systems changes necessary to comply with the amendments to Rule 15c2-11…for fixed income securities.”