Here’s important news that Meredith blogged yesterday on CompensationStandards.com (also see John’s blog on DealLawyers.com about the M&A aspects): Yesterday at an open meeting, the FTC voted 3-2 to approve an expansive ban on the use of non-competes. The WSJ reported that this was particularly historic rulemaking.
[It] marks the first time in over 50 years that FTC officials have issued a regulation to mandate an economywide change in how companies compete. The commission has historically operated like a law enforcement agency, investigating and suing individual companies over practices or deals deemed to violate the law.
Proposed in January 2023, this rulemaking received upwards of 26,000 comments. Here are the 570-page final rule and fact sheet. This excerpt from the fact sheet summarizes the basics:
– The final rule bans new noncompetes with all workers, including senior executives after the effective date.
Specifically, the final rule provides that it is an unfair method of competition—and therefore a violation of Section 5 of the FTC Act—for employers to enter into noncompetes with workers after the effective date.
– For existing noncompetes, the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing noncompetes can remain in force. Existing noncompetes with workers other than senior executives are not enforceable after the effective date of the final rule.
Fewer than 1% of workers are estimated to be senior executives under the final rule.
Specifically, the final rule defines the term “senior executive” to refer to workers earning more than $151,164 annually who are in a “policy-making position.”
While not addressed in the fact sheet, the final rule contains an exception (expanded from the rule’s proposed form) for non-competes entered into in connection with a bona fide sale of a business entity. John described this exception in today’s blog on DealLawyers.com.
The SEC EDGAR Communications Office recently issued this reminder:
Filers are reminded to confirm that internal links in their EDGAR filings are working properly prior to submitting the filings on EDGAR. In addition, filers should check whether existing filings have broken internal links and fix any such links.
It is permissible for electronic filers to include links to different sections within a single HTML document, for example, in exhibits filed pursuant to Item 601 of Regulation S–K. Filers should be aware, however, that incorrect internal links will result in errors surrounding those links when the filings are disseminated.
I didn’t add that emphasis, it’s from the SEC. Most filing agents have a validation function to check internal links – so it’s a good idea to confirm that this step is being performed on your filings. And don’t forget, links have consequences.
A decade ago, Broc blogged about a “robot director.” That seemed far-fetched at the time. But since then, some boards have expanded the use cases for AI in the boardroom – for example, in director recruitment.
Of course, now there are conversations about directors having the type of expertise around artificial intelligence that would allow them to oversee AI risks & opportunities. That’s an appropriate consideration. But why not cut out the middleman? Should we start talking about “AI Directors” instead of directors with “AI expertise”? An Abu Dhabi company is taking the plunge with a non-voting board observer named “Aiden Insight”:
Aiden Insight is a virtual entity with sophisticated AI capabilities that aims to revolutionise the way IHC navigates the complexities of the global investment landscape. The groundbreaking initiative by IHC has been powered by the leading AI capabilities of G42 in collaboration with Microsoft, setting a new benchmark for excellence in AI development in the business and investment sector.
Here’s what Aiden is going to do for the board:
The role of Aiden Insight will encompass a wide range of responsibilities, including continuous data analysis, risk assessment, strategic planning support, innovation tracking, and ethical and compliance monitoring. Aiden will attend IHC Board meetings as a non-voting observer, offering real-time insights to inform discussions and guide decisions.
It sounds kind of appealing, to be honest, but still not a full-fledged board member. That’s because corporate law and the fiduciary duty framework only contemplates directors as natural persons. This HLS blog says that we are getting very close to the era of AI directors – and we really need to be expanding our legal framework to work with that:
As a result, global and national governance standard-setters have until now not been forced address the implications of AI board members. Neither the OECD governance principles nor national standards address the role of AI apart from the expectation that boards consider technology risks. In order for market regulators not to be caught by surprise – as their peers have been in the face of cryptocurrency or car-sharing innovations – the potential role of AI board members needs to be considered now.
This consideration should focus not only on legal responsibility of AI board members but also on aspects of their work that can help companies create value. AI board members may, for instance, be required to participate in board risk or technology committees. The latter are still not required by most regulators and are consequently rarely present even in IT companies which is a governance risk in itself.
The role of AI board members such as Aiden or Vital would need to be clearly defined not only in a sense of fiduciary duty but also from a broader philosophical perspective that would allow for creation of a governance framework in which they would be embedded. The relevant questions, ranging from AI directors’ potential contribution to board diversity to their role in board committees, are only now starting to surface. The latest announcement from Abu Dhabi highlights that there is no time to waste.
We’ve talked around here about the perils of the Audit Committee becoming the “kitchen sink” of the board. Part of the conundrum is that the Committee’s risk oversight role makes it a natural launching pad for new oversight responsibilities. However, the ever-growing list of responsibilities may be contributing to a rise in enforcement activity around financial reporting errors, according to a recent report that John shared. So, it’s more important than ever to review the Committee’s charter & scope with a critical eye, and to keep tabs on developing practices.
Wachtell Lipton’s annual “Audit Committee Guide” can help with this. It dissects the Audit Committee’s oversight duties, lays out the charter & committee membership requirements for NYSE and Nasdaq companies, and gives reminders on prohibited auditor activities, internal controls issues, and more. There are model charters and policies, as always. Lots of good “bread & butter” reminders.
The Guide also reinforces reports that many audit committees are taking on cybersecurity oversight. And it includes a new section on artificial intelligence:
With the recent explosion of artificial intelligence, matters pertaining to artificial intelligence are top of mind for companies, consumers and regulators alike. While the potential benefits of artificial intelligence are being explored, it is important for companies to simultaneously consider the risks, including those related to cybersecurity and privacy concerns.
Legislators and regulators around the world, including in the United States, are currently contemplating, discussing and, in certain instances, passing significant legislation and regulation of artificial intelligence. In notable legislation coming out of Europe in March 2024, the European Parliament approved the Artificial Intelligence Act, which contains regulatory restrictions of artificial intelligence that increase in relation to perceived risks to health, safety and individual rights, and which, among other things, creates a new AI Office within the European Commission. The requirements of the act will be phased in, with the earliest requirements coming into force later in 2024.
In October 2023, an executive order by President Biden laid out certain guiding policy principles and a timeline for artificial intelligence-related action by various sectors of the U.S. federal government. The priorities identified in the executive order are: (1) addressing key security risks, including by developing clear indicators of when content is AI-generated; (2) promoting innovation, competition, and collaboration by investing in AI education and development and addressing novel intellectual property issues; (3) protecting workers’ rights and the quality of workplace life; (4) protecting civil rights; (5) protecting consumer rights; (6) protecting privacy and civil liberties; (7) managing the use of AI in the federal government and any associated risks; and (8) ensuring that the United States is an international leader in AI development and risk management. And regulators have already signaled increasing scrutiny of artificial intelligence-related corporate disclosures, including warning against “AI washing,” which is the practice of overstating or misstating corporate artificial intelligence activity.
Given this emerging tool that comes with both new risks and heightened attention from many different stakeholders, it is important for boards and relevant committees to engage in active oversight of artificial intelligence risk management and to stay apprised of updates in the rapidly-evolving space.
Although a recent survey said that AI was not getting a lot of attention in meetings quite yet, this Guide plants the seed that is another risk that may fall in the Audit Committee’s lap.
This resource is posted along with heaps of other helpful resources in our “Audit Committees” Practice Area. If you aren’t already a member of TheCorporateCounsel.net, start a “no-risk trial” today! 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. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.
When it comes to the “Airing of Grievances” between companies and shareholder proponents, people seem skeptical that it will cause any big change to the shareholder proposal dynamic that we have all grown to know & love. But maybe we shouldn’t jump so quickly to that conclusion. I had actually overlooked that in addition to ICCR, Wespath & Mercy Investment Services (which are both linked with faith-based investment principles and are also ICCR coalition members) have filed this separate notice of exempt solicitation. And this one is more directly framed as a “Vote No” campaign in response to Exxon’s recent actions. Here’s an excerpt:
Exxon’s lawsuit sets a negative precedent that we believe will have a chilling effect on future efforts by shareholders pursuing consideration of proposals seeking to improve corporate sustainability. Hence, we believe investors should vote AGAINST board members with primary responsibility of oversight of the decision to use company funds to litigate rather than pursue standard Securities and Exchange Commission (SEC) procedures.
We see the lawsuit as akin to a “SLAPP suit” – a “Strategic Lawsuit Against Public Participation.” Exxon’s announcement that it intends to continue to litigate its lawsuit despite the proponents’ withdrawal of the proposal further indicates that Exxon is pursuing an intimidation tactic. Nicolai Tangen, the chief executive of Norway’s $1.5 trillion oil fund and owner of 1.4% of Exxon’s stock, told the Financial Times: “We think it is very aggressive and we are concerned about the implications for shareholder rights.”
Who would have predicted this turn of events just three years after Engine No. 1 won multiple dissident seats in an “ESG” framed proxy contest at this same company? Not me! That is why I’m not making any predictions about the final outcome of this saga.
We’re exactly 8 months out from Festivus 2024 (for those who celebrate) – but it is never too early for the Airing of Grievances. Yesterday, the Interfaith Center on Corporate Responsibility filed a notice of exempt solicitation in response to the “scorching diatribe” (John’s words) against shareholder proposals & proponents that Exxon included in its proxy statement earlier this month. ICCR’s statement is also strongly worded. It concludes:
Shareholder proponents fully recognize the challenges an authentic commitment to decarbonization presents for the oil and gas sector, and are eager to work with companies like Exxon Mobil to help make the inevitable transition a smoother one for everyone involved. What is not helpful, however, is the company’s adoption of an aggressive stance towards its investors through litigation and disparaging remarks in its proxy statement to silence dissent. Given the existential stakes for both the business and its stakeholders, it is disappointing that leadership has chosen tactics of intimidation rather than embracing a more open and productive route forward.
As part owners, investors have the right, and indeed the obligation, to engage management and the board on corporate governance concerns or harmful societal impacts that may flow from a company’s operations or strategy. Investors are concerned with corporate impacts that may translate to systemic financial risks to their portfolios in the future and they utilize the proxy process to voice these concerns as is their right. Strong corporate leaders will not find this give-and-take “obstructive or abusive” but will recognize it for the important private ordering mechanism it is intended to be.
ICCR obviously has a dog in this fight – it exists as a coalition of 300+ active institutional investors who regularly submit shareholder proposals. ICCR’s membership ranks include Arjuna Capital, who is one of the proponents Exxon sued earlier this year when seeking a declaratory judgment to exclude a proposal from its proxy statement. Time will tell whether other coalitions and/or proponents join the fray.
John observed that for Exxon’s lawyers, telling off shareholder proponents in the proxy statement may have been a cathartic exercise. Some people are wondering whether this “all guns blazing” approach also will work to reduce the number of shareholder proposals that the company receives. Please participate in this unscientific, anonymous poll to share your guess:
Last fall, the SEC proposed changes to Edgar with the laudable goal of improving security & reliability for filings. Given all of the other new SEC rules and other things on their plates, corporate secretaries probably haven’t had a lot of time to focus on this proposal. The comment file reflects fewer than 30 comments received to-date. The official comment period has closed, but since the proposal would affect the process for D&O and company codes, it might be worth your while to skim through and contact your filing agent if you see any problems. Or, you can watch this 58-minute demo.
Here’s one insightful observation (full disclosure, it is from our wonderful CCRcorp team):
Noting page 51 of the proposed rule where it is stated:
“A user API token would remain valid for up to one year provided that the user associated with the token logged into the dashboard or one of the EDGAR filing websites at least every 30 days. If the user did not log in at least every 30 days, the user API token would be deactivated”.
As a provider of Section 16 filing software, we believe this requirement will cause frustration and become a roadblock when users are already stressed and focused on the filing and deadline. Our users have no reason to regularly log into the EDGAR website. If implemented as proposed, they will at the very least be required to update the user token annually. Requiring monthly logins to login.gov in addition to resetting user tokens annually seems unnecessary and burdensome.
– DFIN is concerned with the notion that only account administrators would be able to submit a Form ID, because the administrator(s) might be busy, unavailable, or decide it’s a menial task. DFIN notes that the person filling out the form and submitting doesn’t necessarily need to be the account administrator, as long as the two authorized account administrators are designated in the Form ID.
– It will be problematic to wipe an account of its authorized individuals if there is a failure to satisfy the proposed annual confirmation requirements. DFIN supports a two-week temporary suspension after a two-week grace period.
– Requiring filing agents to maintain client passphrases doesn’t align with current practices and would be time consuming.
– The rule has benefits; it also will create new costs relating to filing agents needing to update or create an application to manage delegations.
– DFIN suggests that the Form ID should be revised to indicate a rush service and provide guidance for what filing scenarios could prompt a rush.
– DFIN supports making the filer dashboard available even when Edgar is closed.
– DFIN supports a bulk delegation function, where account administrators can delegate filing authority to any Edgar filer.
– For bulk enrollment, DFIN cautions against resetting the CCC for filers, where there may be multiple filing agents. DFIN suggests that the filers must confirm which filing agent is managing their bulk enrolment to eliminate any conflict.
The proposal also includes changes to the Form ID that require information about any criminal convictions or administrative suspensions as a result of a securities law violation – not just for the applicant, but also for each authorized individual, account administrator, anyone signing the Form ID pursuant to a Power of Attorney, and billing contact. Individuals that disclose the existence of these “bad actor” issues may be contacted by the SEC Staff to determine their eligibility for Edgar access.
No huge surprise here, but if you’re the person at your company who is expected to be on top of the status of the SEC’s climate disclosure rules, it’s worth noting that last week, over 30 G.O.P. legislators (and one Democrat) from both chambers of Congress introduced a joint resolution under the Congressional Review Act to attempt to nullify the regulations. Dave had observed this maneuvering last month and John previewed a House Committee meeting on the topic a couple of weeks ago.
The CRA resolution is at a very early stage. This MSN article reiterates that it faces an uphill battle to become law:
To overturn the SEC’s rules, the resolution’s supporters would need to pass it with simple majority rules in both the House and the Senate. If they can manage that, the resolution would then go to President Biden to be signed. If President Biden vetoed the resolution, were it to pass, Congress could override his veto with a two-thirds majority vote in each chamber.
The Sustainable Investment Caucus released a statement saying that the Democrats on the House Financial Services Committee voted unanimously to sustain the SEC’s rule. But the CRA resolution is good political messaging for the folks who signed on. And if by some way it passed, the SEC would be prohibited from proposing a similar rule for 5 years.
When the SEC voluntarily stayed its climate disclosure rules earlier this month, John blogged that in light of the compliance efforts that will be involved and the other disclosure regimes at play, a “go slower” approach may be safer than “pencils down.” This Covington memo gives more color on why it’s risky to become complacent:
– First, the SEC staff is likely to continue issuing comment letters on companies’ current climate-related disclosures, including comments based on the SEC’s 2010 guidance on climate change disclosures.
– Second, many public companies could become subject to separate climate disclosure requirements under laws and regulations adopted in other jurisdictions, such as the European Union and individual states in the United States, most notably in California.
– Third, even if the SEC’s rules are struck down, it is likely that investor pressure will drive continued private ordering resulting in increased and more comparable climate-related disclosures, particularly for larger public companies.
– Finally, the outcome of the challenge to the SEC’s climate rules is uncertain, including with respect to the content of any portion of the rules that is upheld and the ultimate timing of required compliance with such rules.
The memo goes on to outline next steps based on filer status – which is very helpful! There are a number of activities that large accelerated filers may want to consider while the climate disclosure litigation is pending. For companies that may be facing less pressure, the memo recommends:
Accelerated filers, smaller reporting companies and emerging growth companies may also want to consider the steps recommended above for large accelerated filers, to the extent such companies already produce or are considering producing climate-related disclosures. If these companies are not already generating or disclosing climate-related information, they could well use the time afforded by the rules’ challenge to:
– get up to speed on the climate-related reporting and the obligations it would impose on the company, and if material, educate their boards of directors to facilitate the company’s development of corporate governance and risk management policies and procedures related to climate risk;
– if climate-related risks are expected to be material, review climate-related disclosures that competitors, industry leaders, suppliers or end-users make; and
– strategize about the information systems, processes and controls that the company would need to implement if the rules come back into effect.
The Covington team points out that if all or part of the rule is upheld, the SEC is likely to provide some transition period before the clock starts ticking again, although any such transition period will likely depend on the duration and result of the litigation, including which parts of the rules remain intact. The SEC appears to be preparing for a long battle – which may go all the way to the SCOTUS. It is difficult to predict at this point when the final outcome will be determined and what it will be.