The Corp Fin Staff posted a new sample comment letter addressing recent developments in the crypto markets. As is typical in these sample letters, the Staff describes why it is providing the guidance in the form of the sample letter, and then includes a series of sample comments, presumably drawn from experience with actual filing reviews. The sample comment letter notes:
Recent bankruptcies and financial distress among crypto asset market participants have caused widespread disruption in those markets. Companies may have disclosure obligations under the federal securities laws related to the direct or indirect impact that these events and collateral events have had or may have on their business. The Division of Corporation Finance believes that companies should evaluate their disclosures with a view towards providing investors with specific, tailored disclosure about market events and conditions, the company’s situation in relation to those events and conditions, and the potential impact on investors. Companies with ongoing reporting obligations should consider whether their existing disclosures should be updated.
The sample comments focus on a company’s business description, MD&A and risk factors and address a number of topics, including:
– The exposure companies have to crypto markets;
– The impact of recent bankruptcies in the crypto space;
– The steps companies have taken to safeguard crypto assets;
– The use of crypto assets as collateral;
– Recent experience with redemptions and withdrawals; and
– Material risks, including risks arising from excessive redemptions and withdrawals (or suspension of such activity), reputational risks, jurisdictional issues, regulatory developments, safeguarding of assets concerns, risk management issues, access to capital and liquidity issues, and market disruption risks.
– Tackling Your Pay Vs. Performance Disclosures: Navigating Interpretive Issues
– Tackling Your Pay vs. Performance Disclosures: Big Picture Impact
– Tackling Your Pay vs. Performance Disclosures: Key Learnings From Our Sample Disclosures (which includes as “course materials” model disclosures that I prepared for the program)
Note that we will continue to be covering the pay versus performance journey over the coming months, including ongoing coverage of Staff interpretations, disclosure trends and investor reactions. For example, on January 19, 2023 at 2:00 pm Eastern, I will be joined by Mark Borges, Ron Mueller and Alan Dye for a 90-minute webcast, “The Latest: Your Upcoming Proxy Disclosures.” We will share the very latest thinking on pay versus performance disclosures and other important items for the 2023 proxy season.
I have been discussing the new pay versus performance disclosure requirement with management teams and boards of directors over the past few months, and the most frequently asked question is: “What will investors do with this new information?” It is a logical question to ask, because whenever one is drafting new disclosure, it is always important to think about how investors will use that information and what consequences the disclosure might ultimately have for the company.
Unfortunately, when I am asked this question, there is really no good answer at this point. During our 3-part “Special Session: Tackling Your Pay Vs. Performance Disclosures” last month, I was joined by Jun Frank, Executive Director, ISS Corporate Solutions and Rob Main, Managing Partner and COO, Sustainable Governance Partners to talk about how the new pay versus performance disclosure will be perceived by investors and the proxy advisory firms and how they might ultimately use it in their analysis. On this point, Jun Frank noted:
In terms of what is most important, probably many investors will take a “wait and see” approach to see how this disclosure will play out and what companies say about this disclosure, and then start formulating opinions about how to utilize this information. I believe data is important, but in the first year, I expect there’s going to be more focus on the narrative portion of it — how does this tie into your pay versus performance, say-on-pay, CD&A? Does it tell a coherent story and narrative? That qualitative, storytelling aspect of it is going to get no more attention than the data aspect, at least at the outset.
From Rob Main’s perspective, given the uncertainty about how the disclosure will be utilized by investors, it is advisable to engage with investors now on the topic:
From what I’ve understood, very few investors, if any, and proxy advisers, not at all, are going to be incorporating this information into their 2023 analysis. That’s for a variety of reasons. Timing is a big piece of it. Yet, there is still an opportunity in fall engagements for companies to inquire with investors specifically on how they are thinking about this new disclosure.
As far as my views, I noted that consistency of your message is the key when approaching pay versus performance disclosure in the upcoming proxy season:
I’m not in a position to influence what investors or proxy advisers do by any means, but my initial guess is that, at least for the first year or first couple of years, it’s not something that’s going to supplant what people already are doing in the Compensation Discussion & Analysis and in their proxy statement for the benefit of the investors and proxy advisers. It’s something where you can just hurt yourself with this disclosure if it is inconsistent with that broader message and not aligned with the story you’re trying to tell in the other context, and then it just goes to your integrity and whether what you’ve been saying all along is true.
Be sure to check out the rest of the transcript for this session. If you registered for this Special Session, follow the “Access the Session Archives” link to find the videos and transcripts for each of the three panels.
The SEC announced that it will hold an open meeting next Wednesday to consider various matters, and one of the agenda items is to consider adoption of the amendments to Rule 10b5-1 and related disclosure changes proposed back in December 2021.
The SEC proposed to modify the conditions for the use of Rule 10b5-1 plans to include: (i) imposing a cooling-off period before trading could commence under a trading plan; (ii) prohibiting overlapping trading plans; and (iii) limiting single-trade plans to one trading plan per 12-month period. The SEC also proposed to require disclosure of policies and procedures related to insider trading and company practices around the timing of option grants and the release of material nonpublic information. Under the proposal, insiders would be required to disclose the use of Rule 10b5-1 plans in Forms 4 and 5. The SEC also proposed to require that bona fide gifts of securities, which are currently permitted to be reported by insiders on a delayed basis using Form 5, must be reported more quickly on Form 4.
Yesterday, the SEC announced that it is reopening the comment period (again) for its share repurchase disclosure rulemaking, which was proposed back in December 2021 at the same time that the Rule 10b5-1 changes were proposed. Under proposed amendments, the SEC would: (i) require daily repurchase disclosure on a new Form SR, which would be furnished to the SEC one business day after execution of a company’s share repurchase order; (ii) amend Item 703 of Regulation S-K to require additional detail regarding the structure of a company’s repurchase program and its share repurchases; and (iii) require information disclosed pursuant to Item 703 of Regulation S-K and pursuant to Form SR to be reported using Inline XBRL. The SEC’s announcement of the reopening notes:
The Commission is reopening the comment period because, after the proposed amendments were published for public comment, The Inflation Reduction Act of 2022 was enacted. The law imposes upon certain corporations a non-deductible excise tax equal to one percent of the fair market value of any stock of the corporation repurchased by such corporation during the taxable year. As a result, the Commission staff has prepared a memorandum that discusses potential economic effects of the new excise tax that may be helpful in evaluating the proposed amendments.
The DERA memorandum referenced in the reopening release is posted on the SEC’s website. The public comment period will remain open for 30 days after publication of the reopening release in the Federal Register. The reopening was met with criticism from Commissioner Uyeda, who issued a statement noting that the 30-day comment period “commences shortly before, and will overlap with, major holidays later this month” and recommending that a 45-day comment period would be preferable to receive more thoughtful responses.
If you are trying to keep track of where things stand with the avalanche of SEC rulemaking, be sure to check out our “cheat sheet” resource, which tracks selected rulemaking and shows you where on our site you can find practical guidance on each topic. You can find the cheat sheet via the blue nav bar at the top of the home page. If you do not have access to all of the great resources available here on TheCorporateCounsel.net, sign up today, email Sales@CCRcorp.com or call 1-800-737-1271.
Yesterday, the Staff published three new Proxy Rules and Schedule 14A Compliance and Disclosure Interpretations addressing the new universal proxy rules. Two of the new CDIs deal with the company’s obligations when a dissident shareholder’s nominees are rejected based on advance notice bylaw requirements, and one of the CDIs makes the point that a dissident must provide its own proxy card as part of its meaningful solicitation efforts and not just rely on the company’s proxy card. The new CDIs are as follows:
Question 139.04
Question: A registrant receives director nominations from a dissident shareholder purporting to nominate candidates for election to the registrant’s board of directors at an upcoming annual meeting. The registrant, however, determines that the nominations are invalid due to the dissident shareholder’s failure to comply with its advance notice bylaw requirements. Must the registrant include the names of the dissident shareholder’s nominees on its proxy card pursuant to Rule 14a-19(e)(1) under these circumstances?
Answer: No. Only duly nominated candidates are required to be included on a universal proxy card. See Release No. 34-93596 (Nov. 17, 2021) (noting that universal proxy cards “must include the names of all duly nominated director candidates presented for election by any party…”, and explaining that “[a] duly nominated director candidate is a candidate whose nomination satisfies the requirements of any applicable state or foreign law provision and a registrant’s governing documents as they relate to director nominations”). If the registrant determines, in accordance with state or foreign law, that the dissident shareholder’s nominations do not comply with its advance notice bylaw requirements, then it can omit the dissident shareholder’s nominees from its proxy card. [December 6, 2022]
Question 139.05
Question: A registrant determines that a dissident shareholder’s director nominations do not comply with its advance notice bylaw requirements and excludes the dissident shareholder’s nominees from its proxy card. The dissident shareholder then initiates litigation challenging the registrant’s determination regarding the validity of the director nominations. Under these factual circumstances, what are the registrant’s obligations with respect to its proxy statement disclosures and solicitation efforts?
Answer: The registrant must disclose in its proxy statement its determination that the dissident shareholder’s director nominations are invalid, a brief description of the basis for that determination, the fact that the dissident shareholder initiated litigation challenging the determination, and the potential implications (including any risks to the registrant or its shareholders) if the dissident shareholder’s nominations are ultimately deemed to be valid.
If a registrant furnishes proxy cards that do not include the dissident shareholder’s director candidates and a court subsequently determines that the dissident shareholder’s candidates are duly nominated, then the registrant is obligated under Rule 14a-19 to furnish universal proxy cards with the dissident shareholder’s candidates. Accordingly, it should discard any previously-furnished proxy cards that it received. The registrant also should ensure that shareholders are provided with sufficient time to receive and cast their votes on the universal proxy cards prior to the shareholder meeting, including, if necessary, through the postponement or adjournment of the meeting. [December 6, 2022]
Question 139.06
Question: Can a dissident shareholder conducting a non-exempt solicitation in support of its own director nominees simply file a proxy statement on EDGAR, avoid providing its own proxy card, and instead rely exclusively on the registrant’s proxy card to seek to have its director nominees elected?
Answer: No. Rule 14a-19(e) requires each soliciting party in a director election contest to use a universal proxy card that includes the names of all director candidates, including those nominated by other soliciting parties and proxy access nominees. Rule 14a-19(a)(3) further requires a dissident shareholder to solicit holders of at least 67% of the voting power of shares entitled to vote on the director election contest and to include a representation to that effect in its proxy statement. This requirement is intended to prevent a dissident shareholder from capitalizing on the inclusion of its nominees on the registrant’s universal proxy card without undertaking meaningful solicitation efforts. See Release No. 34-93596 (Nov. 17, 2021). A dissident shareholder would fail to comply with these rules if it does not furnish its own universal proxy cards to holders of at least 67% of the voting power through permitted methods of delivering proxy materials (such as the Rule 14a-16 “notice and access” method). [December 6, 2022]
As you are preparing your proxy materials this year, keep in mind that the SEC’s universal proxy rulemaking made changes to the disclosure requirements that apply outside of contested election situations. As we noted in our perennial “Annual Season Items” article in the latest issue of The Corporate Counsel:
Rule 14a-4(b) as amended now requires the inclusion of an “against” voting option in lieu of a “withhold authority to vote” option on the form of proxy for the election of directors if state law gives legal effect to such a vote and also permits shareholders to abstain in an election governed by a majority voting standard. In addition, Item 21(b) of Schedule 14A as amended expressly requires the disclosure of the effect of a “withhold” vote.
In the past, the Staff has expressed concern about the lack of clarity in disclosures concerning the votes required for the election of directors, so we can expect the Staff to be paying close attention to any changes to proxy disclosures that result from this latest round of rule amendments.
If you would like to check out more of our coverage of the important topics you need to know as we enter the upcoming annual proxy and reporting season, please email sales@ccrcorp.com to subscribe to The Corporate Counsel newsletter.
With so much attention on board diversity these days, an inevitable question is whether the increased diversity of corporate boards influences broader diversity gains in companies. It certainly stands to reason that a more diverse board of directors will take actions and influence policies that could promote the DEI efforts of the companies they serve.
A recent National Law Review article highlights an academic study titled “Do Diverse Directors Influence DEI Outcomes?” which examined the influence of more diverse boards on company DEI efforts. The study sought to examine “whether greater board diversity is associated with more diverse workforce hiring, more equitable pay practices, and more inclusive corporate cultures, as evidenced through employees’ perceptions of cultural norms.” The study reviewed a sample of S&P 1500 firms over the period from 2008 through 2020.
The article notes that some of the study’s findings include the following:
– Broad-based board diversity” (a measure that includes gender, ethnicity, age, education, expertise, and board experience) “is statistically associated with increased diversity at all depths.”
– Companies “with an increase in female representation on the board increase the female representation at the company.” The study conservatively estimated that an increase of two percentage points in female board representation is associated with an increase of 5.2% in female employment and an increase of 3.0% in female staff.
– Companies with an increase in female representation on the board also show an increase in non-white representation at the company. An increase of two percentage points in female board representation is associated with an increase of 5.0% in non-white employment, “primarily driven by hiring of non-white staff.”
– The study showed “a meaningful relationship” between non-white directors and non-white employees, but “no relation between non-white directors and female employees within the firm once control variables have been included.” “Thus, the evidence on allyship suggests women are stronger allies for non-white employees than non-white employees are for women.”
– The study found “some evidence . . . that having more non-white directors is associated with lower salary gaps for non-white employees,” but “mostly [saw] little evidence that board diversity alters salary gaps.”
– “Greater broad-based board diversity is significantly associated with a higher number of stars for Glassdoor’s five-star rating system for company culture” and with other metrics evaluating employees’ perceptions of their workplace and management.
– The study found disagreement among rating agencies as to ESG ratings and the S component of ESG. “This suggests that asset managers looking to incorporate gender and racial equity into their investment decision-making process need to look beyond check-the-box approaches to ESG ratings.”
This will no doubt be an area of continued academic study as boards become more diverse and more attention is focused on company DEI efforts.