Jim McRitchie recently blogged about “Campaign GM” – a 1970 Ralph Nader-led shareholder proposal initiative and one of the earliest examples of shareholder ESG activism targeting a major corporation. The blog provides an overview of the campaign and discusses its long-term effects on governance at General Motors and its impact on the broader debate over corporate governance-related issues. It’s a really interesting introduction to a piece of corporate history that I knew very little about. Check it out if you get a chance.
Meredith blogged last week about the demise of the Chevron doctrine and some of its potential implications for the SEC. The conventional wisdom seems to be that the SCOTUS’s Loper decision is a “gut punch” to federal regulatory authority, and the decision has prompted wailing & gnashing of teeth on the Left and jubilation on the Right. However, a recent Law360 article by Dan Berkovitz says that the SCOTUS’s decision isn’t likely to have much of a practical impact on the SEC. Here’s the intro:
The demise of Chevron deference in Loper Bright Enterprises v. Raimondo will not make much of a difference for either the US Securities and Exchange Commission or the Commodity and Futures Trading Commission. The federal courts have a long history, both pre- and post- Chevron, of interpreting the federal securities and commodities laws without deference to the views of the SEC or the CFTC. These interpretations have ebbed and flowed between restrictive and expansive, depending on the philosophical composition of the courts.
In almost all major cases over at least the past two decades, especially in reviews of agency rulemaking, the courts have not granted Chevron deference to these agencies. Rather than charting a new approach, the court’s opinion in Loper reflects the current reality of judicial review for these agencies.
Dan Berkovitz isn’t alone in his assessment. This excerpt from a blog on the decision from the conservative think tank R Street Institute says that there was always less to Chevron deference than meets the eye:
There is also what you might call the dirty secret of judicial deference. Under Chevron, if a judge didn’t like an agency rule, they could usually just say that the rule was unreasonable (or that the statute wasn’t ambiguous) and achieve the same result as if there had been no deference. By contrast, even with the formal Chevron doctrine gone, it’s likely that judges will tend to implicitly defer to an agency’s interpretation more than they would if they had to come up with an interpretation of the rule from scratch.
The SEC’s recent enforcement action against RR Donnelley & Sons is the latest in a series of proceedings in which the agency has broadly interpreted the scope of the Exchange Act’s internal controls provisions. That approach has been sharply criticized by dissenting commissioners and by outside commenters, but in a recent “Radical Compliance” blog, Matt Kelly entertains the possibility that the SEC’s view of the world may be right.
Matt points out that Section 13(b)(2)(B) of the Exchange Act requires companies to maintain internal accounting controls “sufficient to provide reasonable assurances” that, among other things, access to assets is permitted only according to management authorization. He notes that in this enforcement proceeding, the SEC is taking a provision intended to apply to accounting fraud and applying it to cybersecurity – but as he explains in this excerpt, this isn’t necessarily an unreasonable position:
Is it really proper for the SEC to use its books-and-records provision in that manner? Honestly, I dunno. On one hand, we should remember that no actual fraud happened at Donnelley. No transactions were improperly recorded. The company didn’t even suffer a loss of data, since the data was only copied.
On the other hand, Donnelley was locked out of important IT systems. For example, some customers couldn’t receive documentation vital to vendor payments and disbursement checks. If this cyber attack happened in the real world, it would be akin to hooligans strolling into your building, changing the locks to the accounting department, and demanding millions if you want to get the set of new keys. A company that let something like that happen would certainly seem inept to most reasonable investors.
Critics of the SEC (and lord knows there are plenty around) would say the Donnelley case is a novel interpretation of anti-fraud rules, with the SEC basically nosing its way into cybersecurity regulation. That seems outside the SEC’s swim lane.
Then again, suppose those hackers had exploited sloppy cybersecurity controls to steal money from Donnelley rather than copying data, and then covered their tracks by altering the finance department’s banking records. (A frighteningly easy thing to do, by the way.) Few people would fault the SEC for raking Donnelley over the coals then. So why does this case feel a bit weird now, when money wasn’t stolen?
Matt suggests that we step back and look at the big picture – as technology has advanced, the controls required for strong financial reporting and those required for strong cybersecurity are converging into a single system focusing on access control. In this new reality, it’s essential to have strong controls to prevent unauthorized access to IT systems, rather than the historical norm of controls governing access to the accounting department and its physical books and records.
You might think that with all the negative attention from regulators about audit quality issues over the past few years, shareholders might be a little more hesitant to vote in favor of proposals to ratify auditors. However, according to a recent Ideagen/Audit Analytics report, if you thought that, you’d be wrong:
Throughout the last six years, our analysis on shareholder votes reveals that, on average, nearly 98% of total votes are cast in favor of auditor ratification. Shareholder votes filed between January 1, 2021 and December 31, 2023, continued that trend for a sixth consecutive year. Votes against auditor ratification comprised 1.7% of the total votes; abstained votes account for the remaining 0.4% of total shareholder votes cast.
In fairness, the percentage of proposals in which more than 5% of the outstanding shares voted against ratification of the auditors ticked up last year from 7% to 8%, but that still leaves 92% of proposals in which fewer than 5% of the outstanding shares were voted against ratification. Maybe shareholders ought to be a little more reluctant to toe the party line here, because a 2023 study found that higher than expected shareholder dissatisfaction with external auditors is associated with improved audit quality.
A Texas federal judge on Wednesday granted a tax services firm’s motion for a preliminary injunction of the Federal Trade Commission’s nationwide ban on noncompete agreements in employment contracts and has stayed its effective date for the plaintiffs.
As noted, this injunction is limited to plaintiffs and plaintiff-intervenors, but the Court intends to issue a ruling on the merits by August 30, 2024 (before the September 4 effective date). The judge said there’s a “substantial likelihood” that the rule will be found arbitrary and capricious.
On Wednesday, the SEC posted this notice and request for comment for a proposed Nasdaq rule change that would amend Listing Rule 5810(c)(3)(A) to address the situation where a company effectuates a reverse stock split to regain a $1 bid price but, in doing so, trips up another continued listing requirement. This situation is sometimes avoidable; it can be tricky, but companies and their advisors have to take into account all the other minimum requirements when setting a split ratio.
When companies do find themselves in this situation, a new deficiency process is triggered under the existing rules. As amended, a company in this situation will no longer receive additional time to cure non-compliance with the newly violated standard. Here’s an example from the proposal:
Consider a company listed on the Nasdaq Capital Market (“Company A”) that has 1,600,000 Publicly Held Shares. In order to regain compliance with the Bid Price Requirement under Rule 5550(a)(2), Company A effects a reverse stock split at a ratio of 1-for-4. This reverse stock split initially increases Company A’s stock price above $1.00. Assuming Company A thereafter maintains a closing bid price above $1.00 for ten (10) consecutive business days, under current Rule 5810(c)(3)(A), Company A will achieve compliance with the Bid Price Requirement at the conclusion of the tenth (10th) consecutive business day.
However, in this example, at the same time that the reverse stock split increased Company A’s stock price, the 1-for-4 reverse stock split also reduced the number of Publicly Held Shares from 1,600,000 to 400,000, causing Company A to no longer satisfy the minimum number of Publicly Held Shares required to remain listed on the Nasdaq Capital Market. As a result, under these circumstances, the reverse stock split would allow Company A to regain compliance with the Bid Price Requirement of Rule 5550(a)(2) while at the same time causing non-compliance with the minimum Publicly Held Shares requirement of Rule 5550(a)(4).
Under Nasdaq’s current rules, Nasdaq would notify the company about this new deficiency and the company would be afforded 45 calendar days to submit a plan to regain compliance and could be afforded up to 180 calendar days to regain compliance.
Under the proposed amendment, Company A in the example above would continue to be considered non-compliant with the Bid Price Requirement until both the new Publicly Held Shares deficiency is cured and thereafter the company maintains a $1.00 bid price for a minimum of ten (10) consecutive business days. All of this must be accomplished during the compliance period applicable to the initial Bid Price Requirement deficiency.
It’s worth observing here that Nasdaq notes that it is “considering other changes to the delisting process applicable to companies that are noncompliant with the Bid Price Requirement. Any such changes will be subject to a separate rule filing.”
This week, concurrently with the effectiveness of the SEC’s new SPAC disclosure rules on July 1, the SEC updated some website resources related to SPACs, including posting this Small Entity Compliance Guide for SPACs, Shell Companies and Projections. It also updated these FAQs on Voluntary Submission of Draft Registration Statements to add this new question 19 on de-SPACs & co-registrant status:
Question: If a registrant uses the confidential submission process to submit a draft registration statement in connection with a de-SPAC transaction, when should it include any co-registrant’s CIK and related submission information in EDGAR Filing Interface?
Answer: EDGAR does not currently allow the entry of a co-registrant on draft registration statement submissions. See Section 7.2.1 Accessing the EDGARLink Online Submission of the EDGAR Filer Manual. Therefore, the primary registrant should submit the draft registration statement without the co-registrant’s CIK and related submission information. The draft registration statement must contain the information required by the applicable registration statement form, including required information about the target company. The primary registrant must add the co-registrant’s CIK and related submission information in EDGAR when it publicly files the registration statement. See Section 7.3.3.1 Entering Submission Information of the EDGAR Filer Manual. Co-registrants do not need to separately submit the draft registration statements or related correspondence in EDGAR since the primary registrant’s reporting history will include all draft registration statement submissions and related correspondence.
As John noted earlier this week on DealLawyers.com, many people assumed that the new disclosure rules would be the last nail in the coffin for SPAC deals, but he had this positive news to share:
“More than two years after they were first proposed, the Securities and Exchange Commission’s new rules governing special purpose acquisition companies, or SPACs, finally are set to go into effect on July 1. The expectation of tougher requirements, along with the disastrous stock market performance of most SPACS, has already led this market to sink — but it hasn’t killed it. In fact, 2024 is on pace to outdo 2023, which was the worst year for SPACs since 2016, in terms of dollars raised through the IPO market, according to SPAC Insider.
Halfway through this year, SPACs have already raised $2.5 billion, compared with $3.8 billion for the entirety of 2023, according to SPAC Insider. It calculates that are 34 SPACS that have either filed to go public, are searching for a merger partner or have completed a deal, compared with 42 for all of 2023, The average size of the SPAC IPO is slightly bigger, too, at $156.5 million compared with $124.1 million in 2023.”
The article also highlights the significant headwinds that SPACs are facing, including the difficulties many SPACs have experienced in finding a merger partner and the shortened timeframe they have to complete a deSPAC under the SEC’s new rules. Still, while SPACs are certainly ailing, it does appear that they would be right to claim, like the old man in Monty Python and the Holy Grail, that “I’m not dead yet!”
Both the article and the opinion highlight the effort that went into the 2019 proposed rules (including all the study and collaboration done by the SEC Staff over two administrations leading up to the adoption of the 2020 amendments) and the changes made from the proposal when the rules were ultimately adopted to address independence and timeliness concerns raised during the comment period. Ultimately, the Fifth Circuit took issue with the fact that the SEC, when rescinding the rule, cited those same independence and timeliness concerns that the changes to the final rules were intended to address — and in doing so, rejected its earlier factual findings without explanation.
Dave explained that the decision only vacated and remanded the rescission of the “notice and awareness” provision. This is the provision that public companies most celebrated and appreciated — it required proxy advisor advice to be sent to companies at or before the time it was sent to clients and required proxy advisors to make their clients aware of company responses. But these provisions were included in the amended rules as “conditions” that the proxy advisory firms had to meet in order to rely on exemptions from the proxy solicitation rules. An exemption was required because the 2020 amendments also changed the definition of “solicitation” to include proxy voting advice for a fee (codifying prior interpretation).
The thing that makes this particularly wonky is that a federal district court ruled in February of this year in another lawsuit in favor of ISS — finding the SEC “acted contrary to law and in excess of statutory authority” when it amended the definition of “solicitation” to include proxy voting advice for a fee. The SEC and NAM (also a party in that proceeding) have filed notices of appeal of that decision with the DC Circuit. So, here we are with one court saying the 2022 rescission was wrong and another one saying the rescission didn’t go far enough.
Phew! I can’t pretend to know where this will land — and consequently what this will mean for public companies during the 2025 proxy season — but you’re going to want to follow this to be prepared. This is exactly the type of evolving issue that we’ll make sure you hear the latest and greatest on during our fall Proxy Disclosure & Executive Compensation Conferences — not to mention that attendees have the opportunity to hear from Rachel Hedrick, Vice President of U.S. Executive Compensation Research at ISS, and Krishna Shah, Director of North America Executive Compensation at Glass Lewis, for a preview of hot topics that may affect disclosures and voting outcomes in 2025.
In May, Dave predicted that the SEC was unlikely to slow down or stop its rulemaking activity this summer, as sometimes happens in these summer months before a Presidential election. We haven’t seen the Spring 2024 Reg Flex Agenda yet, but this recent Q&A on the Capitol Account Substack with Commissioner Hester Peirce seems to confirm Dave’s suspicions. Here’s an excerpt:
Capitol Account: There’s a lot of rules still in the pipeline at the SEC, but there hasn’t been an open meeting for a while. Are things finally slowing down?
Hester Peirce: No. People have been working very hard. I don’t think that’s changed. There’s a lot of work between open meetings…Chair Gensler still has a busy agenda.
CA: There’s an election coming up and the Congressional Review Act deadline looming. You don’t see the chair taking his foot off the gas at some point?
HP: When he’s in a job, he works hard. That’s going to continue…We’ve done a lot of rulemaking, and I think Chair Gensler is still intent on doing more. I look at his regulatory agenda as my guide, and it’s pretty chock-full.
Commissioner Peirce also discusses crypto regulation, shifting policies in new administrations and her views about being in the political minority on the Commission. Take a look at the full interview.
Thank you to all our loyal blog readers who participated in our first anonymous poll to help us prepare for a fun lightning-round game show at our Proxy Disclosure and Executive Compensation Conferences. We’re really excited that our SEC All-Stars were “game” (pun intended) for a little lighthearted, friendly competition to guess the most popular answers submitted by our blog subscribers to “securities law adjacent” questions, Family Feud-style! We’re also very thankful to our own Dave Lynn, who has graciously agreed to moonlight as “gameshow host” for a day. Maybe Teenage Dave would be proud?!
To that end, we need to enlist you all for help again (and a few more times leading up to the conferences)! If you have 2 seconds to spare, please type in a response to this anonymous poll. We’ll gather and rank responses by popularity. Responses will be hidden, so you’ll have to join day 1 of our Conferences (in San Francisco or virtually) to hear whether your response made the “most popular” list.
Speaking of our Conferences, our “early bird” deal for individual in-person registrations ($1,750, discounted from the regular $2,195 rate) ends July 26! We hope many of you decide to join us in San Francisco, but if traveling isn’t in the cards at that time, we also offer a virtual option (plus video replays & transcripts for both in-person and virtual attendees!) so you won’t miss out on the practical takeaways our speaker lineup will share. (Also check out our discounted rate options for groups of virtual attendees!)
You can register now by visiting our online store or by calling us at 800-737-1271.
Programming Note: We wish you all a safe and happy Fourth! Our blogs will be back on Friday!