A new survey commissioned by the folks behind the CPA-Zicklin Index shows widespread public support for improved governance of corporate political spending. Here are some stats from the survey summary:
– Nationwide, 87% believe that public corporations should be required to have a code of conduct to assess and govern their political spending.
– Similarly, 91% want procedures adopted that would ensure that corporate political contributions are lawfully spent and are consistent with public policies that benefit the company in which they are financially invested.
– Stockholders also feel that a code of conduct would improve a company’s political spending decisions (67%) and give them more confidence in their investment (79%).
– They also believe corporations need to consider the impact of their political spending on broader society (77%).
These survey responses make sense when looking at the Center for Political Accountability’s new report, Corporate Underwriters: Where the Rubber Hits the Road, focused on the impact of corporate political spending on politics — particularly at the state level. The report is intended to provide executives with a guide “for thinking about how to engage with the political process and how to spend corporate treasury funds.”
The report found that political spending by public companies plays “a major role in financing highly contested state political races through third-party 527 groups.” Public companies and their trade associations have contributed more than $1 billion (40% of all funds collected) to “527 Committees” (Republican & Democratic Governors Associations, Attorneys General Associations and State Leadership Committees) and influenced elections that have “reshaped policy and politics” and “had a major impact on our democracy” — including by state attorneys general using lawsuits and briefs to “drive national policy from the state level.” Gosh, that sounds familiar!
For further background, Cooley’s Cydney Posner did a deep dive on the report and risks to companies of public scrutiny of political spending. For companies looking to improve their governance in this area — or when controversies or other developments cause these risks to materialize — the report recommends the CPA-Zicklin Model Code of Conduct for Corporate Political Spending as a means to examine the full consequences of a company’s political spending and better understand the risks of political spending decisions.
The intro to a recent Covington alert made me thankful I’m not navigating political law issues in my day-to-day. Here it is:
With Election Day fast approaching, corporations face increasing pressure from both internal and external forces to make legal decisions about political activities. This can be a fraught area of law, with little understood, highly technical regulatory issues that vary significantly across jurisdictions. Corporate counsel should be mindful of common—and sometimes complicated—political law traps.
The alert lists seven areas for corporations to monitor and best practices to pursue in an election year. Here are two of the timely reminders:
Contribution Reimbursement
Almost every jurisdiction prohibits contributions that are made in the name of another. Therefore, a corporation (or any other person) should never fund a contribution made by one of its employees or any other person, whether through reimbursement, advance, “bonus,” or other funds given with an understanding or expectation they will pay for a contribution that has or will occur. Doing so exposes a company and its executives to criminal penalties. Corporations have sometimes inadvertently reimbursed employees’ political contributions through the corporate expense reimbursement system, and care should be taken to ensure that such systems do not allow for expensing of contributions.
Policies Around Voting
Any company policies regarding voting and elections should be reviewed by counsel to ensure they are consistent with current laws concerning political activity. For example, voter registration drives can be subject to complicated state regulations. Providing gifts or other things of value to encourage voting may raise issues under federal and state laws meant to prohibit vote buying or influence. Additionally, some state employment and labor laws, such as California’s Labor Code, include restrictions on an employer’s efforts to influence employee political behavior. Corporations that do not already have compliance policies governing corporate and employee political activity should consider adopting such policies now.
In mid-August, Liz shared Nasdaq’s proposed rule change to modify the delisting process for certain stocks that fail to regain compliance with the exchange’s bid price requirement. The Commission has since published the notice to solicit comments on the proposed rule change and will decide to approve or reject the changes within 45 to 90 days.
Bloomberg reports that AI and biotech startups are most at risk if the proposed rule change is approved. This Morrison Foerster alert describes the following potential consequences of delisting:
Involuntary delisting can lead to significant market disruptions, increased volatility, reduced access to capital, operational challenges, and damage to investor relations and market reputation. … Companies delisted from Nasdaq are generally relegated to trading on OTC markets. The specific OTC market depends on whether the company continues to file periodic reports and financial statements with the SEC. OTC markets typically have lower liquidity, are more volatile, and offer less visibility, often being perceived as a gray area in the capital markets that carries significant risk. Companies relegated to OTC markets usually cannot engage in traditional capital-raising activities without first securing a successful uplisting back with Nasdaq or the New York Stock Exchange, which generally involves a new listing application coupled with an underwritten offering.
[T]hese companies—or any company at risk of falling into penny stock status—should proactively consider strategic alternatives, such as a privatization, to avoid being quickly forced into delisting.
As Liz pointed out, this proposal comes on the heels of another proposal that would tighten the deficiency process for companies that effectuate a reverse stock split to regain a $1 bid price but, in doing so, trip up another continued listing requirement. Together, these proposals underscore how hard it can be when companies find themselves in a bid price deficiency and employ a reverse stock split. The stakes of missing the “sweet spot” — that is, the split ratio that gets the company into compliance for at least a year but doesn’t trip up other listing requirements — will be higher than ever.
A recent post on the HLS Blog claims that most Nasdaq-listed companies had no trouble disclosing that they met Nasdaq’s minimum number of diverse directors. But the blog goes on to describe what it calls the “interesting cases” — “the small number that have instead opted to explain why they do not meet” the minimum diverse director requirement. It shares example disclosures from 2024 proxy statements identified by Bloomberg’s Andrew Ramonas that you may find helpful if you find yourself with a client in this position.
Below are examples from the blog where a company finds itself temporarily without diverse directors and where company-specific factors might make director recruitment more difficult:
Groupon’s Transitional Phase. Groupon’s situation highlights a common issue where a company may temporarily fall short of diversity goals due to turnover. It “acknowledges and supports the general principles behind the diversity objectives,” but lost its one diverse board member this year. The company’s acknowledgment of the principles behind diversity objectives suggests a willingness to align with NASDAQ’s vision, yet it underscores the reality that board composition is dynamic and subject to change.
Red Rock Resorts’ Particular Constraints. The company says there is a:
relatively limited pool of potential directors who are willing to subject themselves, as well as their families, to the rigorous and intrusive process necessary to obtain a gaming license and the demand for qualified diverse candidates will continue to impact our ability to attract certain categories of diverse directors to serve on our Board.
Red Rock Resorts’ explanation illustrates challenges faced by companies in certain industries, such as gaming, where the process of obtaining a license can be a deterrent for potential directors. This highlights how external factors and industry-specific demands can significantly impact the ability to attract certain kinds of board members.
On the other end of the spectrum are boards that exceed the Nasdaq rule and are looking to promote and highlight the diversity of their board. For a standout example, check out e.l.f. Beauty’s social impact page “Changing the Board Game” highlighting their board diversity and their efforts to promote board diversity even outside the company — for example, by partnering with NACD to sponsor 20 diverse candidates through NACD’s Accelerator Program. The company’s proxy statement (page 2) doesn’t have the Nadaq table (it’s NYSE listed) but touts, “We are proud to be one of only four public companies in the U.S. (out of nearly 4,200 public companies) with a board of directors that is at least two-thirds women and at least one-third diverse.”
The July-August Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This issue includes the following articles:
– Drafting of Corporate and M&A Documents for 2024 Delaware General Corporation Law Amendments
– Soft Earn-out “Promises” as Potential Fraud or Merely Puffery: Delaware Chancery Court Provides Guidance in Trifecta
– Watch Your Derivatives: The Role 13Fs Play in Detecting Shareholder Activism
– We’re Back In-Person – Register Today & Join Us in San Francisco!
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
If you’re on the risk management side of the business – like most in-house lawyers – the risks associated with emerging technologies like artificial intelligence are likely taking up an increasing amount of your time & mental energy. Concerns about those emerging technology risks and identifying effective risk management programs to address them aren’t likely to go away anytime soon. Fortunately, over on Radical Compliance, Matt Kelly recently flagged a new “AI Risk Repository” developed by the smarty-pants at MIT that offers assistance in identifying the risks associated with AI.
This excerpt from Matt’s blog provides an overview of what this resource is all about:
A team of MIT researchers known as the FutureTech Group published the catalog, formally known as the AI Risk Repository, earlier this month. It’s free to all and designed to help a wide range of audiences, from academic researchers to policy makers to, yes, corporate risk managers trying to develop risk assessments for the AI systems running at your company. (Credit to compliance consultant Mark Rowe for noting the repository on LinkedIn earlier this week.)
The 700+ risks are organized into seven primary domains, such as discrimination, privacy, and system safety. Those seven primary domains are then split into 23 more precise sub-domains, which are divided again into even more precise risk categories.
The actual repository exists as a Google spreadsheet you can download, with various columns classifying each risk, describing its potential severity, identifying the potential cause (human versus AI itself; accidental versus deliberate action), and otherwise giving you a wealth of context.
Matt goes on to offer some thoughts on how to put the repository to work in your own risk management and compliance program. He points out that the 700+ risks in the repository were pulled together from 43 separate risk management frameworks and asks whether the existing frameworks used by companies to manage AI risks – like the NIST AI Risk Management Framework and the ISO 42001 standard – are sufficient to meet the challenge.
According to a new report from Arize AI, the number of Fortune 500 companies citing AI-related risk factors in their annual reports has increased by nearly 500% since 2022, with 281 companies currently addressing AI in their risk disclosures. The report says that media and entertainment (92%), software and technology (86%), telecommunications (70%), healthcare (65%) and financial services (63%) lead all other industries in disclosing risks from AI.
The report also includes excerpts from various categories of corporate risk factor disclosures, including competitive risks, regulatory risks, security risks, and what the report calls “general harms”. This latter category encompasses “physical, reputational, or other harms to company or its stakeholders from AI”. Here’s an example of this general harm risk disclosure from Motorola’s annual report:
As we increasingly build AI, including generative AI, into our offerings, we may enable or offer solutions that draw controversy due to their actual or perceived impact on social and ethical issues resulting from the use of new and evolving AI in such offerings. AI may not always operate as intended and datasets may be insufficient or contain illegal, biased, harmful or offensive information, which could negatively impact our results of operations, business reputation or customers’ acceptance of our AI offerings.
Although we work to responsibly meet our customers’ needs for products and services that use AI, including through AI governance programs and internal technology oversight committees, we may still suffer reputational or competitive damage as a result of any inconsistencies in the application of the technology or ethical concerns, both of which may generate negative publicity.
If you found today’s AI-related blogs interesting, you won’t want to miss our “In-House Insights: Governing and Disclosing AI” panel at our 2024 “Proxy Disclosure and 21st Annual Executive Compensation Conferences” – and that’s just one of the 15 timely, topical panels you’ll hear from over our two days of programs. As we’ve mentioned before, one of those panels will feature our SEC All-Stars participating in a “Game Show Lightning Round: All-Star Feud” – and we’re back with another request for your responses to one of the survey questions they’ll be asked to address.
Please take a moment to respond to our latest anonymous poll. We’ll gather and rank responses by popularity. Responses will be hidden, so you will have to join day 1 of our Conferences to hear whether your response made the “most popular” list.
If you haven’t done so already, today is a great day to sign up for our Conferences, which are taking place on October 14th & 15th in San Francisco. There is also a virtual option if you are unable to attend in person. You can register by visiting our online store or by calling us at 800-737-1271.
Earlier this month, the CII released a report on what it refers to as “stealth” dual-class structures – alternatives to multi-class capital structures that allow insiders the control benefits associated with owning high-vote stock without the potential investor relations downsides. Here’s the intro:
Traditional dual-class or multi-class stock structures have received significant attention from market participants because of the disconnect they create between voting rights and economic ownership, thereby insulating company insiders from accountability to the company’s owners. However, it is important for investors to understand that companies can deliver substantially similar entrenchment mechanisms without creating multiple classes of common stock or adopting widely understood anti-takeover devices such as poison pills. In fact, there may be an incentive for insiders to achieve the same control enhancing outcomes without adopting a traditional dual-class structure.
By doing so, they may receive the private benefits of outsized decision-making power without receiving the negative attention and stock price discount accompanying dual-class stock. This paper reviews nine examples of arrangements that could constitute “stealth dual class”: identity-based voting power, side agreements with favored shareholders, stock pyramiding/cross-ownership, umbrella partnerships and C corporations (Up-Cs), employees granting irrevocable proxy voting rights transferred from employees to insiders, golden shares, situational super-class issuances, non-equity votes and vote caps.
The article goes on to explain how each of these alternatives replicates the benefits of a dual-class structure and offers some specific real-world examples. It also says that Delaware’s adoption of new Section 122(18) of the DGCL may facilitate their increased usage, which is a topic about which the CII has previously expressed concern.
Given the wailing and gnashing of teeth over dual-class structures in the US by proxy advisors & investor representatives, it may come as a surprise to learn that UK regulators recently adopted a rule change permitting dual-class companies to list on the LSE. An ISS report on the change notes that it was opposed by many prominent UK & European institutional investors, but also acknowledges a big reason why their objections didn’t carry the day:
As others have highlighted, many of the institutional investors and pension funds that have concerns in relation to the so-called watering down of UK shareholder rights and protections do invest in other financial markets with lower corporate governance standards, and often where the use of multiple class share structures has been the norm for many years.
Indeed, this is not the first time that this has been noted by external observers. Earlier in June 2024, the Chair of Marks & Spencer, Archie Norman, blamed UK pension funds for the decline of the LSE on the grounds that they had cut their UK equity exposure to a shadow of what it had been just decades before. According to a release by the Office for National Statistics, published in December 2023, the proportion of UK shares held by UK insurance and pension funds has fallen dramatically since 1997 when the two sectors held a combined total of 45.7% of quoted shares. By 2022, the holdings of the two sectors had fallen to 4.2%, “the lowest proportion jointly held by them on record”.
As a result, it is not surprising that some observers contend that the recent arguments of some UK pension funds regarding the need to retain shareholder rights and protections ring hollow, given their apparent willingness to invest in other international markets despite the lower protections and corporate governance standards, coupled with their reduced ‘skin in the game’ in the UK market.
ISS goes on to argue that UK regulators should’ve paid more attention to investors’ negative reaction to multi-class structures in jurisdictions where they’re permitted when deciding whether to permit listings on the LSE. On the other hand, maybe regulators just paid more attention to investors’ actions than their words, since they still seem to gobble up dual class companies’ IPOs whenever they get the chance.