At the Northwestern Securities Regulation Institute yesterday, the SEC representatives participating in the conference were not able to offer any further guidance on the timing of the SEC’s proposed rules (other than the SPAC rules, which are to be considered tomorrow). There is certainly no surprise on this front, given that the Commissioners and the Staff are always trying to avoid being seen as front running the Commission’s determinations as to the timing of rulemakings. The timing questions are getting more interesting as we are now in the midst of the presidential election season, which will inevitably put pressure on the SEC to move forward with the more controversial topics on the rulemaking agenda, such as climate disclosure.
On a panel titled “Tackling Your ESG Disclosures in an Evolving World” at the Securities Regulation Institute, the panel speculated about a very specific date for Commission action on the climate disclosure rules. It was discussed that March 8th might be a date by which this rulemaking is considered by the Commission, given the possibility of another government shutdown upon the expiration of the current continuing resolutions and the prospect of invalidation of the rulemaking under the Congressional Review Act.
Lawrence Heim recently noted on the PracticalESG.com blog that, last Wednesday, the NYSE withdrew its Natural Asset Company (“NAC”) listing standard proposal that had been pending with the SEC since September 2023. Liz blogged about the NYSE’s proposal when it was initially filed with the SEC, noting that an NAC would be a corporation with the primary purpose of actively managing, maintaining, restoring, and growing the value of natural assets and their production of ecosystem services.
The proposed listing standards, which were at least two years in the making before being submitted to the SEC, would have required a listed NAC to periodically publish an “Ecological Performance Report,” which would provide key information about the NAC’s performance under a framework developed by Intrinsic Exchange Group (“IEG”), which had been collaborating with the NYSE on the NAC product. An example of how an NAC might have been used in real life would be that a government or individual controlling a natural resource such as a rain forest could set up an NAC and raise capital through an offering of securities listed on the NYSE that would be invested in managing and maintaining that rain forest.
I have been closely following NACs for some time, because potential clients were interested in the novel concept. Admittedly, the proposal was somewhat difficult for people to understand and was potentially controversial, so it was difficult to predict exactly how this effort would ultimately play out once the SEC considered the proposal. It seemed at times that the proposal was somehow tied to the SEC’s efforts to adopt climate disclosure rules, because the NYSE would require its own standards for the information that investors would use when evaluating the performance of the product.
What actually happened with the proposal that ultimately resulted in last week’s withdraw by the SEC pretty unusual. Back in December, the SEC had taken the rare step of instituting proceedings under Section 19(b)(2)(B) of the Exchange Act to determine whether to approve or disapprove the proposed rule change, which involved soliciting additional comment on specific areas of concern and providing until January 18 for those additional comments. It is unusual for exchange proposals to get to this phase, because typically the exchanges will work closely with the SEC to avoid this embarrassing outcome. It appears that the NAC proposal encountered significant opposition, particularly with respect to how NACs could impact the management of public lands. The proposal faced opposition from the House Natural Resources Committee, trade groups, local and state public officials and others. The level of opposition suggests that we are unlikely to see a revised version of NACs come back to life.
As John mentioned on Friday, I am in Coronado, California along with John, Liz and Meredith for the 51st Annual Securities Regulation Institute. This is my first year serving as vice chair of SRI, working with Dixie Johnson of King & Spalding, who serves as chair of the program. It has been an honor to work with Dixie organizing this outstanding program, and I appreciate all of the efforts of our outstanding faculty and the Northwestern staff. I plan to bring you some key insights from the conference in the blog this week.
Proxy season is upon us, so be sure to mark your calendar for January 30 from 2:00 to 3:30 pm Eastern, when I will be joined by Mark Borges, Alan Dye and Ron Mueller for our annual webcast taking a deep dive into what to expect for the proxy season. We plan to address a wide range of topics, including:
– Clawbacks
– Pay vs. Performance Disclosures
– CD&A Enhancements & Trends
– Shareholder Proposals
– Proxy Advisor & Investor Policy Updates
– Perquisites Disclosure
– ESG Metrics & Disclosures
– Say-on-Pay & Equity Plan Trends, Showing “Responsiveness” to Low Votes
– Status of Related Rulemaking
Members are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. The webcast cost for non-members is $595. If you need assistance, send an email to info@ccrcorp.com – or call us at 800.737.1271.
Yesterday, the SEC announced an open meeting to held at 10:00 am eastern on Wednesday, January 24th. This excerpt from the meeting’s Sunshine Act notice indicates that the SEC is ready to act on the SPAC rule proposals that it teed up nearly two years ago:
The Commission will consider whether to adopt new rules and amendments to enhance disclosures and provide additional investor protections in initial public offerings by special purpose acquisition companies (SPACs) and in subsequent business combination transactions between SPACs and target companies (de-SPAC transactions), and to address investor protection concerns more broadly with respect to shell companies.
SPACs were red hot during the first few years of this decade, but they haven’t exactly covered themselves in glory in terms of public investor outcomes and the proposed rules are intended to rein them in by leveling the playing field between SPACs and other IPOs. That being said, I think many industry participants would argue that the rules as proposed wouldn’t just rein SPACs in – they would likely do them in. It will be interesting to see what next Wednesday brings.
If an officer exculpation charter amendment is on your agenda for this year’s annual meeting & you’ve got multiple classes of stock outstanding, I’ve got some good news for you. Last year, the Delaware Chancery Court held that companies with this capital structure didn’t have to hold a separate class vote on these charter amendments, and earlier this week, in In re Fox Corp./SNAP Inc. Section 242 Litigation, (Del.; 1/24), the Delaware Supreme Court affirmed that decision. This excerpt summarizes the court’s decision:
We affirm the Court of Chancery’s judgment. Based on long-standing precedent, which the Class A Stockholders have not asked us to overrule, the powers, preferences, or special rights of class shares in Section 242(b)(2) refers to the powers, preferences, or special rights authorized for a class by Section 151(a) and expressed in the charter as required by Sections 102(a)(4) and 151(a).
The powers, preferences, or special rights of class shares expressed in the charter include default provisions in the DGCL, which are part of every charter under Section 394. The ability to sue directors or officers for duty of care violations is an attribute of the Companies’ stock, but not a power, preference, or special right of the Class A common stock under Section 242(b)(2).
The annual Northwestern Securities Regulation Institute will be held next week in San Diego. I know that many of our members will be there and wanted to let you know that we’ll be there in force. Dave’s vice chairing the event, and Liz, Meredith & I will all be in attendance as well. We hope to have the chance to meet many of the members our community in person, so if you see us, please stop by and say hello!
We shouldn’t be hard to find – Dave will be at the podium, and if you’re looking for the rest of us, just keep your eyes peeled for two very professional looking young women standing next to an old guy who looks like Sir Topham Hatt.
A recent Morgan Lewis memo on white collar issues says that the DOJ is prioritizing corporate criminal enforcement for misconduct implicating national security issues. Here’s an excerpt:
Since the beginning of the Biden administration, the DOJ has loudly proclaimed an interest in increased corporate criminal enforcement in traditional white-collar spaces. However, in recent months, the DOJ has signaled an additional priority: corporate enforcement related to national security issues. In the fall of 2023, the DOJ announced the appointment of the National Security Division’s first chief counsel for corporate enforcement. Ian Richardson, a former federal prosecutor in the US District Court for the Eastern District of New York, was appointed to coordinate and oversee the prosecution of corporate crime relating to US national security. Additionally, Christian J. Nauvel was named as Deputy Chief Counsel for Corporate Enforcement.
Given some of the national security issues that have emerged in recent years, from trade secret theft to the visibility of non-state actors, the DOJ is looking for opportunities to send a message to companies that they need to crack down on misconduct that could have serious national security implications. The DOJ’s focus on national security extends to processes like the CFIUS regulatory process, which is focused on reviewing cross-border investments and not on criminal activity.
The memo says that this increased emphasis on enforcement means that the DOJ will likely increase the number of investigations and subpoenas, and that companies with activities in regions such as China, the Middle East, and Central Asia face the most significant risk of attracting the DOJ’s attention.
Many institutional investors have incessantly whined about vociferously objected to dual-class capital structures, which could be eliminated pretty quickly if they simply refused to invest in IPOs by companies that adopted them. Apparently, that’s not a viable alternative because of “FOMO” or something, but this excerpt from a recent Fenwick memo indicates that institutional investors’ “buy first, whine later” strategy doesn’t seem to be working very well, at least in Silicon Valley:
Adoption of dual-class voting stock structures has continued its more than decade long upward trend among Silicon Valley technology companies, reaching 29.3% of companies in the SV 150 in the 2023 proxy season. Historically, dual-class voting stock structures were significantly more common among S&P 100 companies than among the technology and life sciences companies in the SV 150, though the frequency in the SV 150 has surpassed that in the S&P 100 since 2015.
Other than the recent overall trend in the SV 150, the variation in the percentage of each group over time is primarily a function of changes in the constituents of each group. Within the SV 150, our data suggests that since 2018 there has been a steady increase in dual-class voting structures. That has been a function of companies such as Alphabet (Google), Meta (Facebook), Block (formerly Square), Airbnb, DoorDash, Lyft, Twilio, Zoom Video Communications, and Coinbase joining the SV 150 with dual-class structures.
The memo points out that from 2018 through 2022, 42% of tech companies that went public had a dual- class voting stock structure in place, and that investors expect the trend of companies going public with dual-class structures is likely to continue. That means the percentage of SV 150 companies with dual- class structures is likely to grow as well.
Check out our latest “Timely Takes” Podcast featuring Orrick’s J.T. Ho & his monthly update on securities & governance developments. In this installment, J.T. reviews:
– SEC’s Fall Reg Flex Agenda
– FBI & DOJ Guidance on Seeking Cyber Incident Reporting Delays
– SEC & Corp Fin Guidance on Cyber Incident Reporting Rules
– Israel-Hamas Disclosure Considerations
– ISS’s Updated Proxy Voting Guidelines and FAQs
As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email us at john@thecorporatecounsel.net or mervine@ccrcorp.com.