The EU Green Deal includes multiple pieces of legislation aimed at making Europe the first carbon-neutral continent by 2050. The CSRD is a key element of this legislation that requires companies to make robust disclosures. The law contains extra-territorial provisions that impact in-scope companies headquartered outside of Europe. The CSRD carries hefty reporting obligations, and in-scope companies should be working toward compliance today to avoid a potential regulatory crisis in the future.

Members of PracticalESG.com can tune in at 10 am Eastern tomorrow for the webcast “Understanding the CSRD and its Impacts on US Companies” to hear Donato Calace, Senior Vice President, Datamaran, Jindrich Kloub, Partner, Wilson Sonsini, & Amanda Warschak, ESG Sustainability Director, Teradata, discuss the Corporate Sustainability Reporting Directive (CSRD) and its impact on US companies. This webcast will cover:

Members of PracticalESG.com are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Email sales@ccrcorp.com – or call us at 800.737.1271.

– Meredith Ervine

In a moment of prescience, last week, Liz wrote that this year’s CPA-Zicklin Index “will be published any day” and indeed it came out the very next day. As a reminder, the CPA-Zicklin Index, a collaboration between the Center for Political Accountability (CPA) and The Carol and Lawrence Zicklin Center for Business Ethics Research, has been benchmarking political spending since the Citizens United decision in 2010. As Liz noted, the Index expanded to cover Russell 1000 companies last year in addition to the S&P 500.

In this year’s Index, what stood out for me is just how far ahead the S&P 500 is from the remaining Russell 1000 companies. Here are some stats:

– 78% of S&P 500 companies fully or partially disclosed their political spending in 2023 or prohibited at least one type of spending; for Russell 1000 companies that do not belong to the S&P 500, levels of disclosure are low and prohibitions on types of political spending are limited

– 63% of the S&P 500 have board oversight of political spending; for Russell 1000 companies that do not belong to the S&P 500, that number is only 14%

But not all S&P 500 companies with board oversight cover all the bases. Some companies in the S&P 500 with board committee review of direct political contributions and expenditures still don’t have board committee review of spending through third-party groups, including payments to trade associations and other tax-exempt organizations. For purposes of the Index, that is particularly concerning since those organizations are not required to publicize their donors.

The summary also highlighted the over 10-point difference in scoring between companies who were formally engaged with a proposal and settled versus those that did not:

Of full S&P 500 companies, 234 have been formally engaged by shareholders with a resolution on the issue of corporate political spending disclosure and accountability since the 2004 proxy season. Of these companies, 158 have reached agreements with shareholders. For companies with an agreement, the average overall Index score is 78.6 percent, as compared to 67.5 percent for the 76 companies that were engaged but did not reach an agreement. The average score for the 262 companies that have no history of shareholder engagement is 43.3 percent.

– Meredith Ervine 

The Goodwin team that represented the issuer in the first IPO by a traditional venture-backed technology company in more than 18 months recently wrote an alert explaining why the company’s high vote/low vote capitalization structure — which is very common in venture-backed technology IPOs in the last decade — used the terms “Series” A common stock and “Series” B common stock rather than the more common references to “Class” A and B. The certificate of incorporation also included language clarifying that the high vote & low vote common stock were two separate series, not classes.

The alert states that the typical reference to classes, when series is really intended, “created the potential for ambiguity” in Delaware “about the rights granted to the high vote and low vote stock by virtue of Section 242(b)(2).” For example, in cases against Fox Corp. and Snap Inc., the plaintiffs — while they haven’t been successful in this argument — sought to take advantage of this ambiguity to argue that a separate class vote was required to approve a charter amendment for officer exculpation. The alert contends that these claims could have been avoided if the high vote/low vote stock had been labeled and structured as “series.” Here’s why:

Under DGCL Section 242(b)(2), post-adoption amendments to a company’s certificate of incorporation may require different threshold votes of its stockholders depending on whether the amendment affects multiple classes of stock or multiple series of stock. Under Section 242(b)(2), an amendment that changes the “powers, preferences or special rights” of a class of stock requires a vote of the affected class (voting separately) if that amendment is “adverse” to the class.

In contrast, an amendment that changes the powers, preferences, or special rights of a series within a class of stock requires a separate vote of the affected series only if that amendment is adverse AND the affected series is treated differently than other series. Said differently, if an amendment adversely affects two series of stock but affects both series in the same manner, the stockholder vote required to approve the amendment is a vote of the two series voting together on a combined basis.

Compare this to the treatment of classes. In the case of classes, if an amendment adversely affects two classes of stock, then each class is entitled to a separate class vote on the proposed amendment, even if the classes are affected in the same manner. Thus two separate votes are required rather than one combined vote.

Why does this matter? The net effect of a dual class common stock structure is that under Section 242(b)(2), the company’s low vote stockholders have a separate class vote (and resulting veto power) over a proposed charter amendment that adversely affects the low vote and high vote classes of common stock in the same manner. If the intent is to implement a dual series common stock structure, naming the high vote and low vote stock “Series A” and “Series B” will make it clear that the low vote stock does not have a veto right by virtue of Section 242(b)(2) on amendments that treat the low vote and high vote stock the same.

– Meredith Ervine 

Our updated SEC Compliance & Governance Accelerator — a comprehensive training program for those who need to quickly get up to speed on various governance and SEC reporting topics — is now available! This practical guide is available without charge to members of TheCorporateCounsel.net. It features over 100 resources comprised of chapters from our handbooks, checklists, pithy podcasts & over 200 FAQs from our “SEC Compliance & Governance Accelerator Treatise” for a well-rounded, multi-media experience for audio and visual learners alike. I often encountered folks looking for this sort of training in my practice, including:

– Anyone new to public company corporate work, reporting/compliance or board governance
– Folks in in-house corporate counsel roles at companies preparing to go public
– Anyone new to a public company or board-facing role — including your financial reporting or HR colleagues
– Junior lawyers in law firm corporate departments that represent public company clients
– Legal specialists who represent public companies in their area (e.g., litigation, IP, regulatory) and want to understand the basics
– Last  – but by no means least! – experienced lawyers looking for a quick refresher on compliance or governance topics

If this is your first time working on a proxy, we have a podcast and FAQs on proxy season basics. If you’ve never been through the SEC comment letter process, we have a podcast and FAQs on that too. To quickly navigate to a particular topic, refer to the Forward and Detailed Table of Contents of our “SEC Compliance & Governance Accelerator Treatise.”

– Meredith Ervine 

Last week, ISS announced the results of its 2023 benchmark policy survey. ISS received responses from 239 investors and 216 non-investors, including public companies, board members and their advisors.

The results summary details a number of key findings on E&S matters. One question sought to address whether investors would give companies a pass for reducing their transparency on E&S topics in light of recent ESG backlash. Investors overwhelmingly (85%) responded that the risk of reduced transparency is greater than the risk of political backlash and that they would not tolerate reduced disclosure, even on politically sensitive topics. 49% of non-investor respondents agreed!

On the governance side, ISS sought feedback from respondents on its strict test for professional services relationships:

Under ISS’ current classification of directors, a director who provides professional services to the company or an affiliate in excess of a certain amount (currently $10,000 per year in the U.S.), or who is a partner, employee, or controlling shareholder of an organization that provides such services, is considered to be nonindependent. A director is also classified as non-independent if his or her immediate family member meets any of those criteria. However, a company’s audit firm or law firm may employ thousands of people in numerous offices, many of whom may not have any influence over the services provided to the company.

When asked if it was appropriate to treat a director as non-independent due to a family member’s employment by such a firm, just over half of investor respondents said that it was appropriate. About one-quarter of investor respondents said that the policy was appropriate but that the threshold for considering payments for professional services to be “de minimis” should be increased. In contrast, nearly 40 percent of Investor respondents said that a director’s or his or her family member’s employment by a professional services firm does not raise concerns as long as the director or family member is not involved in the provision of services to the company and does not supervise employees who are involved.

The results will be used to formulate the proxy advisor’s voting policies, which will be released in draft form in November — followed by a public open comment period for all interested market participants — and then finalized in late November or early December. The final policies will apply to shareholder meetings on or after February 1, 2024.

– Meredith Ervine 

Now’s a good time to check in on your process for providing advance notice to your exchange of the public release of the material information. As described in this Loeb & Loeb Quick Takes blog, Nasdaq recently added FAQ Number 1864 containing guidance on completing the electronic disclosure form to provide the required advance notice to Nasdaq’s MarketWatch Department when material non-public information is being announced. The form requires that users select one or more “news categories” that the announcement fits into, and the FAQ provides examples to clarify which categories should be selected in various circumstances. Many are self-evident, but here are some that were not so clear:

– Non-reliance on previously issued financial results should be identified as “Earnings/Quarterly or Annual Reports”
– Events involving milestone payments, material collaborations and/or partnerships should be identified as “FDA-Related/Clinical Trials/Study Results”
– Regaining compliance with Nasdaq’s listing requirements should be identified as “Listing Deficiency or Compliance Notices”

There is also the option to select “Other” for anything that doesn’t fit the listed categories, and I likely would have done that for some of these. While selecting the wrong category may not be particularly consequential, for Nasdaq companies this might be a good excuse to check in with the person or people responsible for submitting your MarketWatch notices to make sure they know the types of announcements that require 10-minute prior notice per IM-5250-1 and that they are indeed providing it in those circumstances. The expansive list is sometimes surprising to the folks responsible, and the process may run like clockwork for earnings releases, but not always for other 8-K events.

– Meredith Ervine 

Check out John’s latest “Timely Takes” podcast featuring a discussion with Skadden’s Brian Breheny and William E. Ridgway on the SEC’s cyber disclosure rules.  In this 20-minute podcast, Brian & William addressed the following topics:

1. How are the SEC’s cyber disclosure rules likely to influence cyber risk management practices?
2. How will the new rules influence the relationship between the cybersecurity and SEC reporting functions?
3. What potential changes to disclosure controls and procedures should companies consider?
4. Will the new disclosure requirements about the processes for managing cyber threats result in changes to those processes?
5. How will the rules influence the way that boards exercise their cybersecurity oversight responsibilities?

If you have insights on a securities law, capital markets or corporate governance trend or development that you’d like to share, please reach out to me or John!  You can email us at mervine@ccrcorp.com or john@thecorporatecounsel.net.

– Meredith Ervine

AI has been especially prevalent in the news this week, following the Executive Order that President Biden issued on Monday (here’s the fact sheet). Among other things, the order gives broad leeway to federal agencies to set standards for the use of AI (e.g., the NIST framework) and for the protection of individual privacy. It’s not a stretch to think that this developing issue is on the SEC’s radar.

With that, here’s a good recap of the recent Securities Enforcement Forum from Holly Carr, who spent a decade in the SEC’s Enforcement Division and is now at BDO. On top of Dave’s recent reminder about cyber risks, this jumped out at me on the topic of AI:

On AI, companies should be assessing how not just their use of AI but how the use of AI by others may expose their business to new or increased risks. For example, how are customers or vendors using AI that may impact your organizations’ risk profile.

As John noted a few weeks ago, we’re continuing to post practical governance & disclosure resources in our “Artificial Intelligence” Practice Area. And on the topic of SEC Enforcement, make sure to mark your calendars for our webcast – “SEC Enforcement: Priorities and Trends” – which is less than two weeks away, on November 15th at 2pm Eastern. We’ll hear from Hunton Andrews Kurth’s Scott Kimpel, Locke Lord’s Allison O’Neil, and Quinn Emanuel’s Kurt Wolfe about the Division’s priorities, the latest developments on “gatekeeper” scrutiny, the pros & cons of voluntary reporting & cooperation, and more. CLE credit is available!

– Liz Dunshee

I don’t know if you’ve heard, but FTX founder Sam Bankman-Fried has been on trial for the past month. Last night, the jury returned a guilty verdict on all counts, after deliberating for only a few hours. Sentencing is scheduled for March. Here’s more detail from CBS News:

The 31-year-old former cryptocurrency billionaire was convicted of two counts of wire fraud conspiracy, two counts of wire fraud, and one count of conspiracy to commit money laundering, each of which carries a maximum sentence of 20 years in prison. He was also convicted of conspiracy to commit commodities fraud and conspiracy to commit securities fraud, which each carry a five-year maximum sentence.

As my kindergartner would say: “Bruh, I can’t even.” The big verdict caps off a busy few weeks of crypto regulatory news. On the SEC front:

1. The SEC dismissed its lawsuit against Ripple (see Dave’s earlier blog)

2. “Crypto Mom” Hester Peirce published a dissent on the Commission’s enforcement action against LBRY

3. The SEC decided not to appeal the Grayscale ruling, which may open the door to a Bitcoin ETF

Meanwhile, states are also getting in on the action:

4. New York AG Letita James is accusing the Winklevoss twins (sorry, the Winklevii) of perpetuating fraud through their crypto exchange & crypto “lending platform”

5. California Governor Gavin Newsom signed a law to create a regulatory framework for crypto (following NY’s lead)

6. NASAA filed an amicus brief to support the SEC’s case against Coinbase

This is not an exhaustive list of developments! I am not sure that there is a “big picture” takeaway other than that fraud is still illegal, and as someone mostly observing from the sidelines, I’m also not sure whether these items collectively show that we are moving closer to a world of acceptable digital assets or further away.

– Liz Dunshee

In the latest 22-minute episode of Women Governance Trailblazers, Courtney Kamlet & I were delighted to interview Cigdem Oktem, who leads EY’s Center for Board Matters in the US Central Region. She launched EY’s regional approach to help boards and C-suite executives benefit from the practices of their peers and CBM insights. Cigdem is a sought-after speaker and facilitator for board and CEO events around the country and is particularly skilled at using the power of storytelling to help leaders ask the right questions. Listen to hear:

1. Cigdem’s career journey in corporate governance & finance – including her roles as a CFO and as an advisor to boards and audit committees.

2. The biggest governance changes that are happening right now.

3. Tips on sharing information and influencing board behavior.

4. What’s next for the EY Center for Board Matters.

5. What Cigdem thinks women in the corporate governance field can add to the current conversation on the societal role of companies.

To listen to any of our prior episodes, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.

– Liz Dunshee