The SEC appears to be on a hiring spree these days. I recently noted on the DealLawyers.com Blog that the SEC was seeking to hire someone to serve as the Chief of Corp Fin’s Office of Mergers & Acquisitions. Now, the SEC is seeking to fill open spots in Corp Fin’s Office of Chief Counsel, where Dave used to lead the Division’s interpretive function. Dave notes:
The SEC has posted two announcements on the USAJobs website for open positions in Corp Fin’s Office of Chief Counsel. One of the announcements describes the general responsibilities for someone serving in the Office of Chief Counsel, while the second announcement seeks a candidate who has experience with compensation and employee benefit plan issues that arise under the securities laws.
I always say that the time I spent in OCC was the highlight of my career – no where else can you encounter so many questions about every aspect of the laws regulating capital raising and public disclosure. In the old days, getting a position in OCC was usually only possible by rising through the ranks in Corp Fin, so it is great that the Division is now posting these positions for candidates from the outside. For any securities lawyers out there who are considering a new challenge, I encourage you to consider these rare opportunities quickly – the postings close on March 14th.
Big news on the “insider trading” front. Earlier this week, the SEC announced that it had filed a civil complaint against the CEO & Chair of a healthcare company for his allegedly improper use of a Rule 10b5-1 trading plan. The SEC is seeking a jury trial in California. In addition, the DOJ announced parallel criminal charges and unsealed a grand jury’s indictment. Whoa! From the DOJ’s press release:
According to court documents, between May and August 2021, Peizer, 63, a resident of Puerto Rico and Santa Monica, California, allegedly avoided more than $12.5 million in losses by entering into two Rule 10b5-1 trading plans while in possession of material, nonpublic information concerning the serious risk that Ontrak’s then-largest customer would terminate its contract.
In May 2021, Peizer allegedly entered into his first 10b5-1 trading plan shortly after learning that the relationship between Ontrak and the customer was deteriorating and that the customer had expressed serious reservations about continuing its contract with Ontrak. The indictment alleges that Peizer later learned that the customer informed Ontrak of its intent to terminate the contract. Then, in August 2021, Peizer allegedly entered into his second 10b5-1 trading plan approximately one hour after Ontrak’s chief negotiator for the contract confirmed to Peizer that the contract likely would be terminated.
In establishing his 10b5-1 plans, Peizer allegedly refused to engage in any “cooling-off” period – the time between when he entered into the plan and when he sold stock – despite warnings from two brokers. Instead, Peizer allegedly began selling shares of Ontrak on the next trading day after establishing each plan. On Aug. 19, 2021, just six days after Peizer adopted his August 10b5-1 plan, Ontrak announced that the customer had terminated its contract and Ontrak’s stock price declined by more than 44%.
If convicted, the CEO faces a maximum penalty of 25 years in prison on the securities fraud scheme charge and 20 years in prison on each of the insider trading charges.
These are the first-ever criminal allegations that relate exclusively to the use of a Rule 10b5-1 plan – and only the second SEC enforcement action. Hold on to your hats, though, because there are likely more to come. As I blogged a few months ago, the SEC’s Enforcement Division has been on the lookout for problematic Rule 10b5-1 plans, after notching its first settlement last September. Like the SEC, the DOJ also says that it has a “data-driven initiative” to identify executive abuses of 10b5-1 trading plans.
While this case – on its face – seems to afford some pretty useful facts for the regulators, it also serves as a giant red flag for any insiders who want to throw caution to the wind and quickly sell shares outside of the as-amended Rule 10b5-1 plan requirements. In this article, the defendant’s lawyer complains that the SEC & DOJ filed their cases without notice, following some “good faith” discussions. So, this initiative appears to be a “full steam ahead” endeavor – which is not a promising environment for anyone whose trades fall in a grey area.
Because trading under a plan that complies with the new requirements of Rule 10b5-1 is not an exclusive affirmative defense, the SEC’s newly effective rules on this topic also require quarterly disclosures of “non-Rule 10b5-1 trading plans” adopted by insiders. This Nelson Mullins blog from Gary Brown & Charles Vaughn asks, “what does that even mean?”
The blog offers a side-by-side comparison of a “real” Rule 10b5-1 plan & a “non-Rule 10b5-1 trading plan” – and closely analyzes whether any distinction actually exists. Here’s the conclusion:
The side-by-side comparison and analysis of a “non-Rule 10b5-1 trading arrangement” and a “Rule 10b5-1 plan” reveals that the only real differences are the cooling off periods and the certification requirements for issuer officers and directors under a “Rule 10b5-1 plan.” No one would realistically dispute that they may not enter into a trading arrangement with a lack of good faith or with the intent to circumvent the securities laws. The prohibition on multiple or overlapping plans is somewhat of a “throwaway”; courts had already ruled that those arrangements were indicators of a lack of good faith in entering into such plans, which resulted in those plans failing to provide an affirmative defense.
Does that mean that a “non-Rule 10b5-1 trading arrangement” is simply one that either:
– does not contain the required “cooling off” period; or
– if adopted by a director or officer, did not contain the required certification?
Take the examples of the limit orders referenced above – if you added a cooling off period and a certification to either order, would that convert it into a “real” Rule 10b5-1 plan? If that indeed is the case, the only difference is that one provides an affirmative defense while the other simply negates proof of “scienter” – an element of a Rule 10b-5 case.
Gary & Charles say that the confusing definition & its related disclosure requirement is going to result in a lot of extra work. Here’s why:
Absent additional SEC guidance, companies must approach these new requirements with extreme care and, in our judgment, err on the side of providing more disclosure than may be necessary regarding “non-Rule 10b5-1 trading arrangements.” That path will require quarterly inquiries to corporate officers and directors about those arrangements. Section 16 reports generally report only trades; therefore, a review of those filings might not reflect the adoption, modification or termination of either “non-Rule 10b5-1 trading arrangements” or “real” Rule 10b5-1 plans.
For companies to meet their new quarterly disclosure obligations, their insider trading policies – which must be filed with the SEC as exhibits – must now require pre-clearance and approval of not only “real” Rule 10b5-1 plans but the host of transactions that might constitute “non-Rule 10b5-1 trading arrangements.”
The blog concludes with language that could’ve made the rule more clear. Unfortunately, that’s not the world we’re living in.
Just a couple of days ago, I blogged that “early returns” from the universal proxy card regime show that the sky isn’t falling (yet). While that may be true for the moment, this HLS blog from Keir Gumbs – Broadridge CLO, SEC/Covington/Uber alum, & long-time friend to many in this community – suggests we also aren’t out of the woods. Keir highlights new Corp Fin guidance on Voting Instruction Forms, which arose as part of the aborted Trian/Disney proxy contest, and could “open the floodgates” to successful activist campaigns. Here’s an excerpt:
Specifically, the staff of the SEC’s Division of Corporation Finance has taken the position that:
– a voting instruction form should mirror the proxy card to the furthest extent possible, including with respect to the instructions relating to signed, but unmarked cards, partially marked proxy cards and overmarked proxy cards, and
– a soliciting party can include the instructions of their choosing so long as the disclosure in the proxy statement, proxy card and voting instruction form are clear to investors.
The SEC took this position in response to a new approach to proxies and VIFs advocated for by the Trian Group. Specifically:
– Unmarked but Signed Proxies and Voting Instructions – Trian Group took the position that unmarked proxy cards and VIFs should be instructed as “FOR” their nominee to the Board and “WITHHOLD” on all of the nominees recommended by The Walt Disney Company.
– Overmarked Voting Instructions – Trian Group took the position that overmarked proxy cards and VIFs (where a shareholder votes “FOR” more directors than available seats) should be marked “FOR” their nominee to the Board, “FOR” the 10 unopposed management nominees and “WITHHOLD” on the one opposed management nominee.
– Partially Marked Voting Instructions – Voting instructions were to be executed exactly as cast i.e., whichever Director nominees get a “FOR” vote will be marked as a “FOR” and the remaining nominees will be marked as “WITHHOLD”
The key to this new approach is disclosure. From the SEC’s perspective, these and similar changes are acceptable under the proxy rules as long as the soliciting party is clear regarding these outcomes.
Keir goes on to explain that this guidance is “meaningfully different” from how this issue has been addressed in the past – where unmarked proxy cards & VIFs would be completed in accordance with management’s recommendation, partially marked proxy cards & VIFs would be submitted only with respect to those items, and overmarked proxy cards & VIFs were returned to banks or brokers for further instructions. Here’s more detail:
The big change resulting from the new SEC guidance most directly impacts how Broadridge processes overmarked VIFs (e.g., voting for 12 nominees when there are only 11 seats that are up for re-election). Historically Broadridge has pulled out overmarked VIFs and sent them to the relevant bank or broker for further instruction from the relevant investor. Now, instead of sending such forms for further instructions, the SEC guidance requires that firms rewrite overmarked VIFs to follow the instructions from the soliciting party regarding such votes. This means, as was the case in the Trian/Disney contest, that an overmarked card could be voted in favor of the soliciting party’s candidates to the Board with withhold votes for the other side’s candidates.
Here’s the good news, per Keir:
One might wonder what this portends for proxy contests based on past practice. There, the news is good. As a starting matter, investors voting online can’t overvote, and we [at Broadridge] are updating our systems to ensure that they can’t undervote either. This means that the proposed changes should not impact voting by institutional investors, which typically represent 70% or more of shares entitled to vote and who largely vote online using the voting tools provided by ISS, Glass Lewis and Broadridge. This also helps for online voting by retail investors, which typically represent 20-25% of shares entitled to vote a proxy. Excluding online voting, we are left principally with the 5-6% of shares that are voted using paper VIFs.
The pool gets even smaller – of the 5-6% of shares that are voted through paper VIFs, a very small percentage – typically less than 0.05% of shares – include overmarks. Those are the VIFs that are most impacted by the new SEC guidance.
Keir agrees that it’s too early for grand predictions about the impact of universal proxy. But he makes clear that we are witnessing a lot of big changes to proxy voting right now. Keir shares that Broadridge is making several changes to accommodate the changing mechanics of proxy contests – including the increasing ability of retail investors to easily vote. Those include Broadridge’s online voting app (ProxyVote), working on pass-through voting solutions, and providing end-to-end vote confirmation. That’s a lot of action!
We’ve just posted the registration links for our “2023 Proxy Disclosure & 20th Annual Executive Compensation Conferences” – which will be held virtually September 20th – 22nd. That’s right, this event has been serving up practical guidance, direct from the experts, for two decades!! For this milestone year, there will be plenty to talk about – and we hope you can join us.
We’re particularly excited about the fact that Corp Fin Director Erik Gerding will be sitting down with our very own Dave Lynn for an interview about his latest views on Corp Fin priorities & expectations.
This interview in itself is a compelling reason to be there. But if you (or your boss) need more convincing, consider these benefits (feel free to pass these along to whomever approves your budgeting requests):
– 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.
– There’s an “early bird” rate!! We understand budgets are very tight and that more cuts could be coming. If you sign up now, you get the best price. This helps us plan ahead, and helps you save money. Register online by credit card – or by emailing sales@ccrcorp.com. Or, call 1.800.737.1271.
You can get a “sneak peek” right now at the topics & speakers who will be joining us. As you can see, it’s an illustrious group. We’ll be sharing more about the session agendas in the weeks & months to come!
The Practical ESG Conference will deliver usable, practical guidance on hot ESG topics, with candid action items that you can take back to your companies and clients. Join recognized ESG practitioners from legal, accounting/auditing and in-house corporate backgrounds to stay ahead of reputational risks, stakeholder demands and regulatory initiatives – and get meaningful pointers to design, implement and improve corporate ESG programs. We’ll be revealing the full agenda in the coming weeks.
Early Bird Rates – Act Now! As a special “thank you” for early registration, we’re offering an “early bird” rate for a limited time. Get the best price by registering today – online by credit card or by emailing sales@ccrcorp.com or calling 1.800.737.1271. You can purchase access to this Conference on a standalone basis – or bundle & save by also registering for our pair of “2023 Proxy Disclosure & 20th Annual Executive Compensation Conferences” the same week.
With ESG touching so many aspects of corporate operations, legal advice & consulting, we often get asked who should attend. We will be providing valuable takeaways for:
– Every person whose responsibilities touch on the wide-ranging scope of environmental, social and governance issues – including diversity, equity and inclusion – and every person responsible for responding to ESG information requests and surveys, anticipating ESG risks and communicating ESG progress.
– In-house practitioners as well as outside advisors – including independent directors, CEOs, CFOs, CIOs, Chief Sustainability Officers, ESG Officers, DEI Officers, General Counsel, Internal Audit management/staff, sustainability and social responsibility professionals and procurement and responsible sourcing professionals.
– Anyone looking for practical guidance, direct from the experts, on navigating the complex & amorphous world of ESG!
I blogged yesterday that recent proxy contests have continued to focus on traditional fundamentals. Although it’s still too early to write off the possibility that non-traditional activists will leverage universal proxy card rules to frame campaigns around “ESG” issues, the world has changed since Engine No. 1’s success at Exxon a couple of years ago – and so has the stock market. A new memo from SquareWell Partners (available for download) looks at whether ESG issues will remain high within investors’ decision-making processes as financial returns become more elusive. If there’s any silver lining to a recession, this might be it:
We see this as an opportunity to overcome “ESG” fatigue where investors and companies alike will be forced to re-evaluate their priorities and focus only on the most material non-financial issues rather than trying to complete an ever-growing checklist of stakeholder demands.
SquareWell analyzes lessons from past recessions – while also acknowledging that the specter of climate change feels more intense than in earlier downturns, and shareholder voting mechanics are changing. For companies that are able to maintain – and demonstrate – a long-term focus that integrates financial & non-financial risk management, SquareWell predicts that opportunities will arise. For those who don’t, evolutions in shareholder activism and M&A may increase their vulnerability.
SquareWell offers these predictions for 2023 (and delves into each of them in the memo):
– Financial and Extra-Financial Risk Management Will be Forced to Coalesce
– Capital Allocation Scrutiny Will Rise
– M&A Rationales Will Require Increased “ESG” Involvement
– Activism Will be Pulled in Opposing Directions
– Boards and Managements Will (Have to) Show Action
– Executive Pay Will Need to be Aligned
This means that ESG materiality assessments & disclosures will actually become more important. But hopefully, the work will also become more productive & worthwhile, as it becomes more clear what to focus on. These are exactly the type of thorny issues we’ll be discussing at our Conferences this fall – and Lawrence Heim and team continue to deliver practical guidance every day on PracticalESG.com. If you aren’t already subscribed to that free blog, sign up today – and become a member of that site for access to the full suite of checklists, filtered subject matter content, podcasts, and more.
Everyone’s been speculating on whether & how the SEC’s universal proxy card rules will impact proxy contests. These rules are a big deal – but a recent memo from Schulte Roth & Zabel says that everyone can take a deep breath – at least for now. That’s because the fundamentals of early UPC activist campaigns have been pretty much the same as they were before the election mechanics changed.
The memo analyzes takeaways from the first 3 actual (and attempted) proxy contests under the new rules. Here’s an excerpt from the conclusion:
As noted above, the early proxy contests conducted under the universal proxy rules have seen companies and activists utilize strategies and themes that brought success prior to the UPC, with adjustments on the margin. At Argo and Aimco, the activists seemingly did not overreach on the size of their slates and attempted to take a surgical approach to board refreshment, including by largely targeting non-diverse men above the age of 65.
Contrary to the concerns that activists will now run campaigns “on the cheap,” the activists in both campaigns also apparently spent (or anticipated spending) a substantial amount of money when pursuing minority board representation—$1,000,000 in the case of L&B at Aimco and $750,000 in the case of CRM at Argo. In addition, at both Argo and Aimco, it seems, consistent with past experience, that ISS and Glass Lewis played meaningful parts in the outcome of each contest and that both used analytical frameworks that remained substantially unchanged from the pre-UPC era.
Finally, while we are still in the infancy of the universal proxy rules, the expected uptick in substantial activism has not yet come to fruition. Since the effectiveness of the universal proxy rules, the number of announced election contests, campaigns that have resulted in a board seat, and public settlement agreements are all at depressed levels relative to equivalent periods during the two prior years. For companies, it does not appear that the sky is falling. For shareholders, it does not appear that it’s open season. But, as the universal proxy rules age and the activism landscape settles around the UPC, we anticipate that the next two- to three-year period will reveal the true, immediate import of the mandatory use of universal proxy cards in certain director election contests.
In a couple of recently proposed rule changes posted for notice on the SEC website, Nasdaq has made immediately effective changes to modernize some of the provisions governing fees that the exchange charges companies.
The first set of amendments stems from a change to Nasdaq’s initial & all-inclusive annual fees that became effective at the beginning of this year. These January fee updates do the following:
(i) replace the tiered entry fee structure with a flat fee of $270,000 when a Company first lists a class of equity securities on the Nasdaq Global or Global Select Market;
(ii) modify the Exchange’s all-inclusive annual listing fees for all domestic and foreign companies listing equity securities covered by Listing Rules 5910 and 5920 on the Nasdaq Global Select, Global and Capital Markets;
(iii) replace the two-tier entry fee structure with a flat fee of $80,000 when an Acquisition Company, as defined in Nasdaq rules, first lists a class of equity securities on Nasdaq;
(iv) adopt an all-inclusive annual listing fee structure specific to Acquisition Companies listing on the Nasdaq Capital Market; and
(v) replace the current three-tier all-inclusive annual listing fee structure for all Acquisition Companies with a two-tier structure.
Nasdaq is now effecting clean-up amendments to Rules 5910 & 5210 – to delete expired & obsolete provisions that are no longer relevant in light of the simplified fee structure.
In addition to its updates to initial & annual listing fees, Nasdaq has also proposed an immediately effective update to increase the fees it charges companies seeking review of a delisting determination, public reprimand letter or written denial of an initial listing application. Here’s more detail:
Pursuant to Nasdaq Listing Rule 5815, companies may seek review of a determination by the Nasdaq’s Listing Qualifications Department (“LQ Staff”) to deny initial listing or delist a company’s securities or to issue a Public Reprimand Letter, by requesting a hearing before an independent Hearings Panel (the “Hearings Panel”). Listing Rule 5815(a)(3) provides that to request a hearing, the company must, within 15 calendar days of the date of the LQ Staff delisting determination, public reprimand letter, or written denial of an initial listing application, submit a hearing fee in the amount of $10,000.
Companies may also appeal a Hearings Panel decision to the Nasdaq Listing and Hearing Review Council (the “NLHRC”). Listing Rule 5820(a) requires a company seeking such an appeal to submit a fee of $10,000. Nasdaq last changed these fees in 2013.
Nasdaq now proposes to increase the fee for review by a Hearings Panel to $20,000 and the fee to appeal a Hearings Panel decision to the NLHRC to $15,000. Nasdaq is increasing the fees because the costs incurred in preparing for and conducting hearings and appeals have increased since the fees were last changed.
While the new fees aren’t exorbitant, they’re a big increase on a percentage basis. That might be a tough pill to swallow for companies that are already in a rough position. But you can’t blame Nasdaq for needing to bump up the rates – have you seen the price of eggs lately?!
Comments are due 21 days after publication of the proposal in the Federal Register – here’s the form.