A new Delaware case that was filed last week may impact how far stockholder agreements can go, as reported in Law360. Brian Seavitt – who was also a plaintiff in the SolarWinds litigation – filed a class action complaint taking issue with a stockholder agreement between a publicly held company and two private equity firms.
The stockholder agreement gives the firms a contractual right to remove directors, approve borrowing arrangements and other significant corporate transactions, and terminate or hire the CEO. It also allows the private equity directors to veto other directors’ selections to fill board vacancies. The plaintiff wants to invalidate parts of the agreement as unenforceable under the Delaware General Corporation Law.
Private equity folks will be watching this case as it proceeds. On Twitter, Tulane’s Ann Lipton pointed out that it also could have implications for public companies with “special governance rights.” A 2021 study that Ann shared from Michigan Law School’s Gabriel Rauterberg found that 15% of companies going public from 2013 – 2018 had a shareholder agreement that continued after the IPO.
In addition, dual-class shares have surged in prevalence at new public companies over the past few years – with nearly one-third of 2021 IPOs having that capital structure. The rights in a dual-class situation can vary – as explained in this paper from BYU Law’s Jarrod & Gladriel Shobe that Ann linked to – but whichever way you slice it, the structure isn’t not appreciated by institutional investors. Those investors have risen up to fight for equal rights for common equity holders – and they likely will be watching this lawsuit.
3. Board Leadership Disclosures: Lessons From Corp Fin’s Sweep
4. Director Skills & Backgrounds: Why Your Disclosures Need a Refresh… & How To Do It
5. Proxy Fights: Practical Steps for UPC’s Sophomore Year
6. Proxy Disclosures: 12 Things You’ve Overlooked
7. Shareholder Proposals: Finding Success in a Challenging Environment
8. The Latest on Rule 14a-8 No-Action Relief
9. Political Spending: Practical Governance & Disclosure Steps for Fraught Times
10. Human Capital Management: Are You Ready for Detailed Disclosure?
11. Insider Trading & Buybacks: What You Need to Do Now
12. Cyber Risk Disclosures: Key Action Items
13. Climate Disclosures: Requirements & Risks
14. The SEC All-Stars: Executive Pay Nuggets
15. The Top Compensation Consultants Speak
16. Pay Versus Performance: What’s New for Year Two
17. Clawbacks: Key Action Items Now
18. ESG Metrics: Beyond the Basics
19. Navigating ISS & Glass Lewis
I’m very proud of the group of experienced speakers that we’ll be bringing together here – lots of former SEC Staff and other heavy hitters – it’s difficult to spotlight specific folks because everyone is so great! And (especially now that I’ve returned to private practice) I’m excited to get practical guidance as we head into another challenging proxy season & grapple with SEC rule changes, Delaware law issues, an unpredictable political environment, and more.
The Conferences are virtual, September 20th – 22nd. You can bundle registration with the “2nd Annual Practical ESG Conference” that’s happening virtually on September 19th, for an additional discount. Register online by credit card – or by emailing sales@ccrcorp.com. Or, call 1.800.737.1271. Here’s a reminder of the benefits of attending:
– The Conferences are timed & organized to give you the very latest action items that you’ll need to prepare for the flurry of year-end and proxy season activity. Why spend time & money tracking down piecemeal updates to share with your higher-ups & board – all while you’re under a deadline and have other pressing obligations, increasing the risk of mistakes – when you can get all of the key pointers at once?
– Unlike some conferences, the on-demand archives (and transcripts!) will be available at no additional charge to attendees after the event, and you can continue to access them all the way till July 2024. That means you can continue to refer back to the sessions as issues arise. Again, saving time & money.
– Due to new SEC rules, the shareholder proposal environment, the increasing emphasis on risk oversight and pressures that companies are facing from both ends of the political spectrum, the performance of boards, individual directors and – thanks to Delaware’s latest spin on Caremark, individual officers – will be subject to greater & greater scrutiny in the coming proxy seasons. That could affect director elections, as well as your company’s ability to raise capital, and your directors’ and officers’ exposure to derivative claims. Our expert panelists will be sharing practical action items to protect your board & officers – and risks to watch out for. Facing a low vote for any director is a nightmare scenario, even if you’re not the target of a proxy contest. This event will empower you to avoid that situation.
On Monday, President Biden vetoed a resolution that would have overturned the latest version of the DOL’s “ESG” rule, which was vulnerable because it was just finalized in November. I blogged about the rule on our “Proxy Season Blog” at that time – it allows ERISA fiduciaries to consider ESG factors in the selection of investments for retirement plans and in proxy voting.
With this being the first veto of Biden’s Presidency, it’s getting a lot of press – including on this recent episode of “The Daily” podcast, which succinctly overviews “the state of ESG” for anyone who’s understandably lost track of the back & forth.
Unfortunately for those of us who spend time on ESG-related shareholder resolutions and engagements, we know that this is just the latest chapter in a saga that has been playing out for many years – with the Biden Administration’s 2022 iteration of the rule changing a version that had been finalized by the Trump Administration in 2020 that would have prohibited consideration of ESG factors by ERISA fiduciaries in investing, and so on, back to at least 2015. I personally am finding that this history makes it harder to share in any excitement or outrage that is accompanying this veto.
On Friday, the SEC’s Chief Accountant, Paul Munter, issued a statement on the responsibilities of lead auditors to conduct high-quality audits when involving other auditors. He notes this has become a prevalent practice:
The increasing integration of world economies and the resultant globalization of multinational public companies has led to increased use of, and more significant roles for, accounting firms and individual accountants other than the lead auditor (“other auditors”) on many issuer audit engagements.
In 2021, for example, 26 percent of all issuer audit engagements and 57 percent of large accelerated filer audits involved the use of other auditors by the lead auditor. In some cases, engagements include the use of other auditors that may not even be registered with the Public Company Accounting Oversight Board (“PCAOB”) and that work in countries with different business cultures and languages from those of the lead auditor.
Here’s the part that’s most relevant to audit committees & companies – and those of us who advise them:
Audit committees make significant contributions to financial reporting through their critical oversight of the independent auditors. With respect to the use of other auditors, audit committees should be actively engaging with the lead auditor to consider the sufficiency of their quality control system, specifically those policies and procedures around supervision and evaluation of the audit work performed by other auditors. This also includes giving careful consideration to the lead auditor’s use of other auditors, especially in areas of significant risk, and engaging in related dialogue in response to communication requirements. Potential questions that audit committees could be asking their auditors include, but are not limited to the following:
– Are there other participating accounting firms that play a substantial role in the audit?
– If so, are they registered with the PCAOB and subject to PCAOB inspections?
– How does the lead auditor supervise the audit work performed by other auditors?
– How does the lead auditor assure that the work is being performed by other auditors that understand the requirements of the applicable financial reporting framework and the PCAOB’s auditing and related professional standards?
We also remind issuers and audit committees that if an unregistered firm plays a substantial role in the audit, the issuer’s financial statements are considered to be “not audited.” Any accompanying annual report, proxy statement, or registration statement containing or incorporating by reference such financial statements creates potential liabilities for the issuer and others, and may result in time consuming and costly remediation efforts. Therefore, management and audit committees should engage with the auditors regarding the PCAOB registration status of other auditors.
The statement also covers lead auditor’s responsibilities in these situations and how those responsibilities are incorporated in PCAOB standards. Paul has been preaching the need to pay attention to audit quality in a series of speeches over the past several years – including this one focused on engagement structures specific to China-based audits, commentary on auditor independence, and this 2021 year-end statement that flags “audit quality” as a key focus area.
The SEC’s proposed climate disclosure rules aren’t yet final, but companies should still be paying close attention to the Commission’s 2010 interpretive release. A recent PwC analysis of Corp Fin’s 2022 disclosure review activity underscores why: climate disclosure has broken into the “top 3” most prevalent topics that are drawing comments on Form 10-K & 10-Q filings – a trend that was noticeable as early as Q1 last year.
If you haven’t already made sure that your CSR/ESG/Sustainability report and your SEC filings are consistent with each other – not just “not conflicting” but also in terms of expansiveness – now is the time to do that. PwC explains:
These comments are largely focused on information related to climate change-related risks and opportunities that may be required in a company’s description of business, legal proceedings, risk factors, and management’s discussion and analysis of financial condition and results of operations. In these letters, the staff frequently commented on:
– inconsistencies between a registrant’s corporate social responsibility report and its SEC filings;
– the lack of disclosure in a registrant’s SEC filing of the risks, trends, and impact of climate change for the registrant and its business; and
– the lack of disclosure in a registrant’s SEC filings related to pending, or existing climate-related legislation and regulations that could have a material impact on a registrant’s business.
The memo gives several examples of specific comments that have been issued. Here’s a few:
– We note that you provided more expansive disclosure in your corporate social responsibility report (CSR report) than you provided in your SEC filings. Please advise us what consideration you gave to providing the same type of climate-related disclosure in your SEC filings as you provided in your CSR report.
– Disclose the material effects of transition risks related to climate change that may affect your business, financial condition, and results of operations, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks, or technological changes.
– There have been significant developments in federal and state legislation and regulation and international accords regarding climate change that you have not discussed in your filing. Please revise your disclosure to identify material pending or existing climate change-related legislation, regulations, and international accords and describe any material effect on your business, financial condition, and results of operations.
Other areas of focus during the past year included several “old favorites”: MD&A, non-GAAP, segment reporting, revenue recognition, disclosure controls, and more. We’re posting info about comment letter trends in our “Comment Letter” Practice Area, which is also where you can find our “SEC Comment Letter Process Handbook.” The Handbook shares guidance on how to navigate the response process and includes insights from Sidley’s Sonia Barros & Sara von Althann, who both spent time on the Staff.
Two years ago, I wrote that anticipating Larry Fink’s annual letter to CEOs, a 10-year tradition which typically has arrived in January, was like waiting for Moses to come down from the mountain. He softened his tone last year. Now, it’s apparent a “vibe shift” has arrived. Mr. Fink has finally made it clear…in March…that this year, there will be no pontificating to CEOs. At least, not as directly as in years past.
Instead, he’s sticking to updating BlackRock’s investors – via an 18-page letter published last week. That hasn’t stopped corporate folks from poring over his commentary for hints on how the world’s largest asset manager might vote at annual meetings this year, and what its priorities will be.
The term “ESG” doesn’t appear anywhere in the letter. That’s a sign of the times since that terminology, and investors’ involvement in encouraging ESG disclosures, has become a lightning rod for politicians (and wannabe politicians). However, it would be a bridge to far to declare that this means that ESG has been “cancelled” or that BlackRock has given up on long-term, sustainable value creation. The letter still gives plenty of play to the importance of solid corporate governance in the midst of evolving risks & opportunities – e.g., talking about the “price of easy money” in the wake of recent financial industry issues, and how that compares to BlackRock’s strong returns. The asset manager’s co-founder, Chair & CEO is also still continuing to beat the “climate transition” drum, although that message keeps getting refined away from directing portfolio companies what to do and towards how this is a choice for BlackRock’s investor clients:
Better data is essential. More than half of the companies in the S&P 500 now voluntarily report Scope 1 and Scope 2 emissions. I expect that number will continue to rise. But as I have said consistently over many years now, it is for governments to make policy and enact legislation, and not for companies, including asset managers, to be the environmental police.
Transition toward lower carbon emissions will reflect the regulatory and legislative choices governments make to balance the need for secure, reliable and affordable energy with orderly decarbonization.
We know that the transition will not be a straight line. Different countries and industries will move at different speeds, and oil and gas will play a vital role in meeting global energy demands through that journey. Many of our clients see the investment opportunities that will come as established energy companies adapt their businesses. They recognize the vital role energy companies will play in ensuring energy security and a successful energy transition.
He goes on:
Some of the most attractive investment opportunities in the years ahead will be in the transition finance space. Given its importance to our clients, BlackRock’s ambition is to be the leading investor in these opportunities on their behalf.
I wrote last year that the next 1,000 unicorns won’t be search engines or social media companies. Many of them will be sustainable, scalable innovators – startups that help the world decarbonize and make the energy transition affordable for all consumers. I still believe that. For clients who choose, we’re connecting them with these investment opportunities.
The letter also touts BlackRock’s new “voting choice” initiative and has this to say about stewardship activities:
Making these decisions requires understanding how companies are responding to evolving risks and opportunities. Changes in globalization, supply chains, geopolitics, inflation, monetary and fiscal policy, and climate all can impact a company’s ability to deliver durable value. Our stewardship team works to promote better investment performance for our clients, the asset owners. The team does that by understanding how a company is responding to these factors where financially material to the company’s business, and by advocating for sound governance and business practices. For many of our clients who have entrusted us with this important responsibility, BlackRock’s stewardship efforts are core to what they are seeking from us.
At the same time, we believe that adding more voices to corporate governance can further strengthen shareholder democracy. But democracy only works when people are informed and engaged. As more asset owners choose to direct their own votes, they need to make sure they are investing the time and resources to make informed decisions on critical governance issues. Proxy advisors can play an important role. But if asset owners rely too much on a few proxy advisors, then their voice may fall short of its potential. I certainly believe that the industry would benefit from more proxy advisors who can add diversity of views on shareholder issues.
Amid these shifts, companies will also need to find new ways to reach their shareholders who choose to direct their own votes, and robust disclosures and advances in the proxy ecosystem will become even more important.
I blogged about BlackRock’s 2023 voting guidelines a few months ago. If they’re a big shareholder at your company, make sure to review those and their “Global Principles” as you head into annual meeting season.
Here’s an update from John’s DealLawyers.com blog yesterday (make sure to connect with him at Tulane if you’ll be there this week!):
On Friday, Corp Fin finished its long-awaited build-out of the Tender Offer Rules & Schedules CDIs by issuing 34 CDIs addressing a wide range of interpretive issues. As anyone who’s ever researched tender offers knows, most of the Staff’s guidance has been scattered across the old Telephone Interps & other locations on the SEC’s website, with only a handful of topics addressed in the CDIs. All of that guidance has finally been consolidated into a single location. The intro to the page provides some insight into where all of the new CDIs came from:
These Compliance and Disclosure Interpretations (“C&DIs”) comprise the Division’s interpretations of the tender offer rules. Many of the C&DIs replace the interpretations previously published in the Tender Offer Rules and Schedules Manual of Publicly Available Telephone Interpretations, Excerpt from November 2000 Current Issues Outline, and Excerpt from March 2001 Quarterly Update to Current Issues Outline (namely, C&DIs 101.05 through 101.16; 104.01; 104.02; 130.01 through 130.03; 131.01 through 131.03; 144.01; 146.01; 149.01; 158.01; 161.01; 162.06; 162.07; 163.01; 164.01; and 181.01). C&DI 101.04 replaces Question 2 in the Schedule TO section of the July 2001 Interim Supplement to Publicly Available Telephone Interpretations.
As this Gibson Dunn blog points out, there’s not a lot that’s new here in terms of substantive guidance. Still, there’s so much that’s new to this page on the SEC’s website that I think you may find this version that I dug up from the Internet Archive showing what the page looked like before Friday’s changes helpful. Members of DealLawyers.com can also access this redlined copy of the CDIs that I posted in our “Tender Offers” Practice Area.
By the way, I know that many of our readers will be in attendance at the Tulane Corporate Law Institute later this week. I’ll be there as well and hope to have a chance to meet you during the conference. I’m easy to find – just look for a guy who appears to be a cross between Butterbean & Sir Topham Hatt!
It’s been a couple years since we’ve had a non-GAAP enforcement action. Last week, the SEC reminded us that they’re still watching for problems. The Commission announced charges against a company for allegedly misleading disclosures about its non-GAAP financial performance in multiple reporting periods from 2018 until early 2020.
One of the things that got the company in trouble was allegedly failing to adopt disclosure controls & procedures specific to non-GAAP measures. The SEC says that led to misclassifications of excluded expenses and misleading disclosures of what exactly had been excluded. Here’s more detail from the 11-page order (also see this Cooley blog):
The company also had insufficient processes to ensure that its business practices for classifying costs as TSI were consistent with the plain meaning of the company’s own description of those costs in its periodic reports filed with the Commission and in its earnings releases. The absence of a non-GAAP policy and specific disclosure controls and procedures caused employees within the business units and in the Financial Planning & Analysis area (“FP&A”) to make subjective determinations about whether expenses were related to an actual or contemplated transaction, regardless of whether the costs were actually consistent with the description of the adjustment included in the company’s public disclosures. As a result, the company negligently misclassified certain internal labor costs, data center relocation costs that were unrelated to the merger, and other expenses as TSI costs.
Without admitting or denying the findings in the order, the company consented to a cease-and-desist order, to pay an $8 million penalty, and to undertake to develop and implement appropriate non-GAAP policies and disclosure controls and procedures. The SEC considered the company’s cooperation and remedial actions in accepting the settlement offer.
I blogged a few weeks ago that “disclosure controls” enforcement actions are trending. We all need to pay attention to the link between disclosure controls & disclosure content – including for voluntary disclosures – because the SEC certainly is doing that. As Lawrence noted last week on PracticalESG.com, the SEC’s interest in whether companies are accurately explaining what makes up the information they’re providing could also translate to scrutiny of ESG disclosure controls in the future.
On the criminal enforcement front, I blogged last week on CompensationStandards.com that the DOJ has provided important guidance on a new pilot program that could reduce criminal fines for companies that are able to show that they’ve clawed back incentives from employees who were involved in the misconduct. Companies can also get credit for showing compliance-related compensation incentives, which this Gibson Dunn memo says could include:
– A prohibition on bonuses for employees who do not satisfy compliance performance requirements;
– Disciplinary measures for employees who violate applicable law and others who both (a) had supervisory authority over the employee(s) or business area engaged in the misconduct, and (b) knew of, or were willfully blind to, the misconduct; and
– Incentives for employees who demonstrate full commitment to compliance processes.
In addition, the DOJ updated guidance on corporate monitorships, employee personal devices & use of messaging platforms. The DOJ also continues to emphasize that it may give leniency when companies fully cooperate with investigations and remediate the problems, which John blogged about earlier this year. We’re posting memos about what the DOJ is looking for in our “Compliance Programs” Practice Area.
Tune in tomorrow at 2pm Eastern for the webcast – “Managing Enterprise-Wide Risks: The Intersection of ERM & Legal” – to hear Orrick’s J.T. Ho, Tesla’s Derek Windham, NetScout’s Jeff Levinson, American Express’s Ming-Hsuan Elders, and WestRock’s Stephanie Bignon discuss the role of the legal department in enterprise risk management, how ERM differs from traditional risk management, what you need to consider when implementing an ERM program, the SEC’s focus on ERM disclosures, and the relationship between ERM & ESG.
This program is very timely not only in light of recent Delaware court decisions – but also because it comes as companies are navigating banking industry issues that may affect corporate financing, risk & decision-making. Don’t miss it!
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
CLE credit is available! We will apply for CLE credit in all applicable states (with the exception of SC and NE who require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
