NAVEX recently announced the release of its 2024 Whistleblowing & Incident Management Benchmark Report. In 2023, internal reporting programs were used at record levels, and the substantiation rate (rate of reports found to be true) was at an all-time high at 45%. Those combined statistics gave me pause — but NAVEX says this is good news. “For those with trusted and effective internal reporting programs, this added up to greater visibility into the trends of risk, ethics and culture playing out in their organizations’ operations – real-time intelligence to inform business decision-making.” They also noted that more companies are taking action.
Highlighting the seriousness with which organizations are taking reports received, more substantiated reports (18%) resulted in separation from employment in 2023, up significantly from 14% in 2022 and 12% in 2021. The share of reports resulting in no action – effectively the opposite end of the outcome spectrum – fell from 17% in 2022 to 14% in 2023.
NAVEX reported information for employees versus third parties for the first time, and the results of this analysis may surprise you.
Third parties as a group delivered a far greater median share of reports related to Business Integrity matters than employees in 2023 (50% versus 17%). Encompassing topics like conflicts of interest, vendor issues, fraud, global trade and human rights, this category of issues can manifest in various elements of a supply chain.
Third-party reporters also showed twice the median share of Accounting, Auditing & Financial Reporting reports as employees in 2023 (10% versus 4.5%).
If you’re looking to assess your own reporting program, NAVEX notes that a “diverse array of topics, inquiries, and allegations in internal reporting” usually indicates that a company’s program is robust and “even minor efforts to promote internal reporting significantly improve the mix of report types received.”
In December, the WSJ reported that “557 stocks listed on U.S. exchanges were trading below $1 a share, up from fewer than a dozen in early 2021, according to Dow Jones Market Data. The majority of these stocks—464 of them—are listed on the Nasdaq Stock Market.” As John shared in December, the article attributed the increase to the SPAC market and Nasdaq’s grace period for compliance with the minimum bid price rule:
Many of today’s sub-$1 stocks went public in 2020 and 2021 during a boom in initial public offerings and deals with special-purpose acquisition companies. Mergers with SPACs were a popular way for startups to go public until a regulatory crackdown in 2021 slowed the SPAC craze. […]
Under Nasdaq rules, a company whose shares fall below $1 for 30 days gets a warning stating that it is noncompliant and has 180 days to get its share price back above the threshold. At the end of that period, many companies get an additional 180-day grace period if they say they are considering a reverse split or some other way to get back above $1.
Last August, Nasdaq filed a proposed rule with the SEC to establish listing standards related to notification and disclosure of reverse stock splits, citing the significant increase in reverse splits the exchange has seen in the last two years, often involving issuers trying to regain compliance with the minimum bid price requirement. The SEC approved that proposal in November.
Since all signs point to reverse stock splits remaining popular, and August 2023 DGCL amendments are also at play here, companies in this conundrum should check out this Honigman memo on reverse stock splits, which includes a post-shareholder approval implementation timeline with helpful reminders of all the third parties that need to be contacted or coordinated with in addition to Delaware and Nasdaq — like DTC, CUSIP Global Services and, of course, your transfer agent.
Keith Bishop recently shared thoughts on the application of state securities laws — specifically in California — to reverse stock splits.
Happy April! If you’re one of the many companies finalizing their proxy statements (including the beneficial ownership table) and turning to annual meeting preparation, check out this 2024 Annual Meeting Handbook from Broadridge covering the nuts and bolts of the annual meeting process & sharing helpful tips — like what documents Corporate Secretaries should have in their annual meeting binders.
We also have a great “Conduct of the Annual Meeting” webcast lined up for Thursday, April 11, from 2 to 3 pm Eastern. We’re excited to hear Peter Farah, Deputy General Counsel and Assistant Secretary, The J.M. Smucker Company, Carl Hagberg, Independent Inspector of Elections and Editor of The Shareholder Service Optimizer, William Kennedy, VP – Product, Broadridge Corporate Issuer Solutions, and Erick Rivero, Senior Assistant General Counsel, Intuit, provide practice pointers and discuss trends in meeting format & logistics, rules of conduct, and other matters companies will confront at their 2024 annual meetings.
After other jurisdictions, including the EU and California, adopted climate-related disclosure requirements, many in-scope companies stopped worrying quite as much about the looming specter of final SEC climate disclosure rules. It seemed like those jurisdictions were already requiring a heavy lift that could be leveraged for SEC reporting. And, as expected, when the final rules were adopted, they were significantly scaled back from the proposal. But now that we are almost a month out from adoption and companies and their advisors have further digested the 885-page adopting release, they recognize just how prescriptive some of the requirements are (in ways that may differ from other reporting regimes) and how many complicated materiality judgments will need to be built into the climate reporting process — not to mention the work that will be involved for DCPs and ICFR.
As John and others have suggested, companies facing multiple reporting regimes should be engaging in a scoping exercise to determine what requirements apply to their operations and comparing what they will need to disclose in each jurisdiction. To that end, Kristina Wyatt of Persefoni recently addressed this topic in our related webcast, and now the ESG and Sustainability Advisory team at Cooley prepared this resource identifying key differences between the EEU’s Corporate Sustainability Reporting Directive (CSRD), California’s three climate disclosure laws (Senate Bills 253 and 261 and Assembly Bill 1305), and International Financial Reporting Standards (IFRS) S1 and IFRS S2 (which legislation in numerous jurisdictions may mandate). The alert includes helpful tables comparing the requirements and the timelines of each.
As the alert describes, the patchwork will only get more complicated. Check out the map of corporate sustainability disclosure requirements in this HLS blog from the ISS team. While the SEC said in the adopting release that “jurisdictions have not yet integrated the ISSB standards into their climate-related disclosure rules,” Cooley says that additional complication is imminent:
The reporting landscape is likely to become increasingly complex, with numerous jurisdictions, including Australia, Hong Kong, Singapore and the United Kingdom, planning to adopt, or having already adopted, legislation to integrate the climate-related disclosure framework developed by the International Sustainability Standard Board (ISSB) – International Financial Reporting Standards (IFRS) S1 and IFRS S2 – into their corporate reporting.
Companies will need to assess how global regulatory developments impact their SEC disclosures related to transition risk and in other, more specific ways. Here’s an example from the alert:
In addition, on March 15, 2024, the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) was approved by the Council of the EU. Subject to final approval by the European Parliament, expected in April, the CSDDD will become law and will apply to certain companies as early as 2027. For in-scope US companies, the CSDDD will generate additional climate-related obligations, including a mandatory requirement to adopt and put into effect a climate transition plan that aims to ensure, through best efforts, that their business models and strategies are compatible with the limiting of global warming to 1.5 °C. In addition to potentially impacting SEC climate target and transition plan disclosures, these CSDDD obligations may also impact how companies analyse climate risk and emissions materiality in future SEC disclosure.
As if the regulatory patchwork wasn’t complex enough, you can’t lose sight of investor demands, which the Cooley alert noted may drive further utilization of ISSB’s IFRS S-1 and S-2. You may also need to consider what tools investors use when assessing their own exposure to climate-related risk and how their investments in portfolio companies impact their risk exposure — even if you’re not using or disclosing how you use those tools. For example, ISS ESG, the sustainable investment arm of ISS STOXX, just announced last week that it’s expanding its suite of suite of Climate Solutions, which are intended to “help investors gain a better understanding of their exposure to climate-related risks and gain insights in managing their investment portfolios,” with a new Scenario Analysis Dataset.
The new dataset covers around 30,000 issuers. The outputs, such as Implied Temperature Rise or cross point year metrics, are based on the comparison of Scope 1, 2 and 3 emissions projections with sector- and region-specific pathways. The different approaches to emissions projections and the range of pathways contribute to an in-depth forward-looking analysis of climate-related risks and opportunities, at medium and long-term time horizons. For instance, ‘realized’ emissions and emissions projections that include issuers’ targets will allow investors to assess the level of ambition of, and progress towards, their own disclosed GHG reduction target.
Leading public climate pathways incorporated in the new Scenario Analysis Dataset include the International Energy Agency’s World Energy Outlook 2022 (IEA), The United Nations Environment Programme’s One Earth Climate Model (OECM) and the Network for Greening the Financial System (NGFS) Climate Scenarios Phase 3. The set also captures the Net Zero emissions by 2050 scenarios based on the Glasgow Financial Alliance for Net Zero (GFANZ) recommendations.
Companies that incorporate scenario analysis to assess the impact of climate-related risks or are considering doing so may want to dig deeper on the new Climate Scenario Analysis dataset to understand what information will be provided to ISS clients and how this may impact their portfolios.
Here’s something John shared last Friday on the DealLawyers.com blog:
The Chancery Court’s recent decisions in Crispo, Moelis, and Activision Blizzard have caused a lot of angst in the M&A community. Yesterday, the Delaware Bar took steps to calm the storm by recommending proposed amendments to the DGCL designed to address the uncertainty created by these decisions. Here’s an excerpt from this Richards Layton memo summarizing some of the proposed changes:
– Section 122, which enumerates express powers that a corporation may exercise, is being amended in response to the Delaware Court of Chancery’s opinion in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., — A.3d —, 2024 WL 747180 (Del. Ch. Feb. 23, 2024), to provide that a corporation may enter into governance agreements with stockholders and beneficial owners where the corporation agrees, among other things, to restrict itself from taking action under circumstances specified in the contract, require contractually specified approvals before taking corporation action, and covenant that it or one or more persons or bodies (which persons or bodies may include the board or one or more current or future directors, stockholders or beneficial owners of stock) will take, or refrain from taking, contractually specified actions.
– New Section 147 is being added in light of the Delaware Court of Chancery’s opinion in Sjunde AP-Fonden v. Activision Blizzard, Inc., 2024 WL 863290 (Del. Ch. Feb. 29, 2024), to provide that, where the DGCL requires the board of directors to approve an agreement, document or other instrument, the board may approve the document in final form or substantially final form. The new section will also provide that, where the board has previously taken action to approve an agreement, document or other instrument that is required to be filed with the Delaware Secretary of State (or required to be referenced in a certificate so filed (e.g., a certificate of merger or certificate of amendment)), the board may ratify the agreement, document or other instrument before the instrument effecting the act becomes effective.
– New Section 261(a)(1) is being added in light of Crispo v. Musk, 304 A.3d 567 (Del. Ch. 2023), to provide, among other things, that a target company may include in a merger agreement a provision that allows the target to seek damages, including damages attributable to the stockholders’ loss of a premium, against a buyer that has failed to perform its obligations under the merger agreement, including any failure to cause the merger to be consummated.
– New Section 261(a)(2) is being added to provide that stockholders may, through the adoption of a merger agreement, appoint a person to act as stockholders’ representative to enforce the rights of stockholders in connection with a merger, including rights to payment of merger consideration or in respect of escrow or indemnification arrangements and settlements.
Other proposed amendments would address additional concerns raised by these decisions. In response to Activision, Section 232 of the DGCL would be amended to provide that any materials included with a notice to stockholders would be deemed to be part of that notice, and a new Section 268 would be added to address ministerial matters relating to the adoption of a merger agreement.