Last week, ISS published the results of its most recent benchmark policy survey, and this year, respondents had quite a bit to say about poison pills. The survey is part of ISS’ annual global policy development process and was open to all interested parties to solicit broad feedback on areas of potential ISS policy change for 2025 and beyond. The survey’s results reflect responses from investors and non-investors. This latter group is comprised primarily of public companies & their advisors. Not surprisingly, the survey found that they differ when it comes to what’s acceptable when it comes to poison pills. Here are some of the highlights:
– When asked if the adoption by a board of a short-term poison pill to defend against an activist campaign was acceptable, 52% of investor respondents replied “generally, no”, while 65% of non-investor respondents replied “generally, yes”.
– When asked whether pre-revenue or other early-stage companies should be entitled to greater leeway than mature companies when adopting short-term poison pills, 56% of investors and 43% of non-investors said that such companies should be entitled to greater leeway on the adoption of a short-term poison pill, as long as “their governance structures and practices ensure accountability to shareholders.”
– When asked about whether a short-term poison pill trigger set by a board below 15 percent would be acceptable, the most common response among investor respondents was “No” (39%), while the largest number of non-investor respondents (38%) said “yes, the trigger level should be at board’s discretion.”
– When asked whether a “two-tier trigger threshold, with a higher trigger for passive investors (13G filers) would be considered a mitigating factor in light of a low trigger, 78% of non-investor respondents said “yes, it should prevent the pill from being triggered by a passive asset manager who has no intention of exercising control.” On the investor, while 41% agreed with the majority of non-investor respondents, 48% considered that “no, all investors can be harmed when a company erects defenses against activist investors whose campaigns can create value, so the lowest trigger is the relevant datapoint.”
Also, it turns out that investors like their pills to be “chewable.” The survey found that nearly 60% of investors found a qualifying offer clause in a pill to be important and a feature that should be included in every pill. A small majority (52%) of non-investors said that this feature was “sometimes important” depending on the trigger threshold and other pill terms.
Check out the latest edition of our “Timely Takes” Podcast featuring my interview with Remy Nshimiyimana and Oderah Nwaeze of Faegre Drinker regarding Delaware’s process for ratifying defective corporate acts. In this 10-minute podcast, Remy & Oderah covered the following topics:
– Overview of Delaware’s statutory procedure for ratifying defective corporate acts
– Examples of the types of defective acts that can be ratified under this statutory procedure
– Limitations on a corporation’s ability to ratify defective acts
– Shareholder approval requirements
– The Role of the Chancery Court
Our discussion was based on Faegre’s recent memo, “Ratification of Defective Corporate Acts: An Overview”, which members of TheCorporateCounsel.net can access in our “Delaware Law” Practice Area. If you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share, we’re all ears – just shoot me an email at john@thecorporatecounsel.net or send one to Meredith at mervine@ccrcorp.com.
We have many interesting topics on the agenda for our “Proxy Disclosure & 21st Annual Executive Compensation Conferences” next week – including color commentary about updated disclosure requirements that will apply for 2025, and what you need to do now to prepare. This Covington memo summarizes what will be new next year for calendar-year companies. At a very high level:
– File your insider trading policies and procedures as exhibits to Form 10-K
– Discuss your insider trading policies and procedures in your Form 10-K (or incorporated proxy)
– Provide narrative and tabular disclosure about the timing of stock options and option-like instruments in close proximity to disclosures of MNPI
The memo also recaps the many changes that became effective during 2024 – which of course we’ll need to continue to comply with going forward – as well as guidance on cyber incident reporting, universal proxy rules, pay-versus-performance, and XBRL tagging.
In case you forgot, the SEC’s climate disclosure rules were also adopted – and stayed – earlier this year. The memo recommends that companies keep thinking about how their disclosure controls and procedures may need to change if the rules do go into effect.
Yesterday, the SEC posted notice of an NYSE proposal that, if approved, would make it harder for penny stocks to linger around as listed companies. Here’s what the change would look like if adopted:
Notwithstanding the foregoing, if a company’s security fails to meet the Price Criteria and the company (i) has effected a reverse stock split over the prior one-year period or (ii) has effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 200 shares or more to one, then the company shall not be eligible for any compliance period specified in this Section 802.01C and the Exchange will immediately commence suspension and delisting procedures with respect to such security in accordance with Section 804.00.
Furthermore, a listed company may not effectuate a reverse stock split if the effectuation of such reverse stock split results in the company’s security falling below the continued listing requirements of Section 802.01A.
The proposed rule would apply to a company even if the company was in compliance with the Price Criteria at the time of its prior reverse stock split. The NYSE’s rationale for the proposal isn’t too surprising:
As described above, many companies seek to cure their noncompliance with the Price Criteria or seek to increase their stock price for other reasons by effectuating a reverse stock split. However, the Exchange has observed that some companies, typically those in financial distress or experiencing a prolonged operational downturn, engage in a pattern of repeated reverse stock splits. The Exchange believes that such behavior is often indicative of deep financial or operational distress within such companies rendering them inappropriate for trading on the Exchange for investor protection reasons. In these situations, the Exchange has observed that the challenges facing such companies, generally, are not temporary and may be so severe that the company is not likely to maintain or regain compliance on a sustained basis.
If this proposal looks familiar, it’s because Nasdaq has also been looking to rein in the use of reverse splits as a compliance strategy. As Meredith noted a few months ago, this type of rule change, if approved, would make it more important to strike the right balance in calculating a reverse split.
In addition to this proposal about reverse splits, the NYSE is shaking its fist at delinquents. The Exchange also proposed a rule change to say that it would not review a compliance plan submitted by a listed company that is below compliance with a continued listing standard if the company owes any unpaid fees to the Exchange. Under this proposal, the NYSE would immediately commence suspension & delisting procedures if the fees aren’t paid in full by the plan submission deadline or at the time of any required periodic review. Here’s the SEC notice for that one.
Earlier this week, the US Government Accountability Office released its annual report on the effectiveness of the SEC’s conflict mineral rule in promoting peace & security in the DRC and adjoining countries. This year, the GAO did not bury the lede, naming the report: “Peace and Security in Democratic Republic of the Congo Have Not Improved with SEC Disclosure Rule.” In fact, according to the GAO, the data shows that the rule has actually contributed to the spread of violence at some mines. Here’s an excerpt from the 1-page highlights:
GAO found no empirical evidence that the rule has decreased the occurrence or level of violence in the eastern DRC, where many mines and armed groups are located. GAO also found the rule was associated with a spread of violence, particularly around informal, small-scale gold mining sites. This may be partly because armed groups have increasingly fought for control of gold mines since gold is more portable and less traceable than the other three minerals. Further, GAO found that the number of violent events in the adjoining countries did not change in response to the SEC rule.
Page 13 of the report gives a good overview of the troubled journey of the conflicts mineral disclosure rule and the current Staff and Commission indications about enforcement.
The GAO did find that the rule has encouraged companies to take a closer look at supply chains, and it’s raised awareness about the risks that mineral purchases will benefit armed groups. But the GAO says that minerals are only one factor contributing to conflict in the DRC and adjoining countries, so “transparent sourcing” is both extremely challenging and inadequate on its own to meaningfully improve peace and security.
Many of our friends and readers are preparing for Yom Kippur today. We are sending wishes to everyone for a peaceful year.
In addition to comments from the Corp Fin Staff on cyber-related Form 8-K disclosures that Dave & Meredith previously shared, we’re beginning to see comment letters that the Staff has issued on Form 10-K cybersecurity disclosures. These disclosures were first required this year under Item 106 of Regulation S-K. Here’s a sampling of early comments (some of which I’ve paraphrased):
– We note that leaders from your information security, compliance and legal team oversee cybersecurity risk management. Please revise future filings to provide the relevant expertise of such persons or members in such detail as is necessary to fully describe the nature of the expertise as required by Item 106(c)(2)(i) of Regulation S-K.
– We note statements that you have not currently engaged any third-party service providers to support, manage, or supplement your cybersecurity processes, and that your Audit Committee receives updates from and discusses matters with your third-party IT support specialists. These statements appear inconsistent. Please revise future filings to clarify whether you engage assessors, consultants, auditors or other third parties in connection with your processes for assessing, identifying and managing material risks from cybersecurity threats as required by Item 106(b)(1)(ii) of Regulation S-K.
– We note you do not include Item 1C. Cybersecurity. Please revise or advise us why you do not provide disclosures as applicable under Item 106 of Regulation S-K.
Although comment letters are company-specific, these are the types of comments we’d expect to see out of the Disclosure Review Program as the Staff assesses “Year 1” compliance for this rule. The Corp Fin Staff isn’t looking to “play gotcha.” But if your disclosure has inconsistencies, or if you forgot to include Item 1C – or a specific element – you might be asked to correct that.
Yesterday, the SEC announced that it is monitoring the impact of Hurricane Milton on capital markets – and that it also continues to monitor the impact of Hurricane Helene. We continue to think of all those affected by these back-to-back catastrophic weather events.
The SEC will evaluate relief from filing deadlines as needed. Here’s more detail:
The SEC divisions and offices that oversee companies, accountants, investment advisers, mutual funds, brokerage firms, transfer agents, and other regulated entities and investment professionals will continue to closely track developments. They will evaluate the possibility of granting relief from filing deadlines and other regulatory requirements for those affected by the storms. Entities and investment professionals affected by Hurricane Milton or Hurricane Helene are encouraged to contact SEC staff with questions and concerns:
– Division of Examinations staff in the SEC’s Miami Regional Office can be reached by phone at 305-982-6300 or email at miami@sec.gov
– Division of Examinations staff in the SEC’s Atlanta Regional Office can be reached by phone at 404-842-7600 or email at atlanta@sec.gov
– Division of Corporation Finance staff can be reached by phone at 202-551-3500 or via online submission at www.sec.gov/forms/corp_fin_interpretive
– Division of Investment Management staff can be reached by phone at 202-551-6825 or email at imocc@sec.gov
– Division of Trading and Markets staff can be reached by phone at 202-551-5777 or email at tradingandmarkets@sec.gov
– Office of Municipal Securities staff can be reached by phone at 202-551-5680 or email at munis@sec.gov
Here is something that Meredith blogged earlier this week on our Proxy Season Blog for members:
Bloomberg reports that 22 state AGs announced an inquiry late last week in the form of a joint letter to Nasdaq alleging that the exchange’s board diversity rule may conflict with both State and federal anti-discrimination laws. The letter asks the stock exchange to provide “a summary and specific documentation of Nasdaq’s rules and policies requiring its listed companies to follow federal and State anti-discrimination laws and any legal analysis explaining how those laws comport with Nasdaq’s purportedly aspirational quotas.”
It requests that Nasdaq respond by October 23. In a statement to the WSJ, Nasdaq says it “designed the framework to preserve each company’s decision-making authority over its board composition.”
The signatories to the letter are some of the “usual suspects” in terms of challengers to DEI-related policies. In addition to joining amicus briefs in the pending litigation in the Fifth Circuit challenging Nasdaq’s board diversity rule, they have also challenged the proxy advisors’ DEI proxy voting policies.
As usual, we were inundated with announcements about SEC enforcement activity during the final days of September. I can’t wait to see the full stats. One settlement in particular stood out amidst the FYE crunch – and it’ll probably get your directors’ attention too. The SEC announced charges against a former director who allegedly failed to inform the rest of the board about a “close personal friendship” with a company executive.
In the SEC’s view, that caused the company’s proxy statements to contain materially misleading statements that inaccurately identified the director as “independent” under listing standards and its own governance guidelines. When the company learned of the relationship (which came to light during a CEO succession planning process), it determined that the director was not actually independent under these standards.
The complaint elaborates on the relationship and how it was concealed. Here’s an excerpt:
Around 2017, Craigie began to mentor Executive consistent with his practice of mentoring employees with growth potential. Shortly thereafter, Craigie formed a personal friendship with Executive, who, at this time, was head of a Church & Dwight division. Over the next few years, Craigie and his spouse vacationed internationally with Executive and his spouse six times, traveling to eight countries on five continents. Craigie invited several other couples on these trips and generally paid for all guests’ business class airfare and luxury lodging. Craigie paid over $100,000 for Executive and his spouse to attend these vacations.
Craigie and Executive, along with their spouses, also vacationed together domestically over long weekends, and Executive occasionally stayed at Craigie’s apartment in Miami. Craigie took Executive and his family on boat trips in New York, Connecticut, and Miami.
This blog from Cooley’s Cydney Posner points out that this isn’t the first time Enforcement has brought charges relating to director independence disclosures (here’s my blog about the earlier case). But this current action was more surprising because rather than tripping over one of the line-item independence (or interlock) rules, it turned on the “catch-all” aspect of director independence – i.e., the affirmative determination that there is no material relationship with the company, with broad consideration of all relevant facts and circumstances. Gunster’s Bob Lamm elaborates on the “slippery slope” concern:
There have been many cases over the years in which directors were alleged – often by investors and/or the media – to have lacked independence because they belonged to the same country club, served on the same boards (including boards of charitable organizations), or generally hung out in the same social circles. Some of these cases generated calls for SEC rulemaking that would require disclosure of these informal relationships and thereby disqualify directors in such cases from being described as independent. However, for whatever reason (and I can think of a few), the SEC never took such action.
So, what does “close personal friendship” mean? The SEC appears to have chosen that language carefully – so it’s clearly more than a casual friendship. Although it’s difficult to say where exactly to draw the line, if you encounter a situation in which a director and executive regularly vacation together on a yacht and around the world, you should think hard about whether they’ve crossed it.
Without admitting or denying the SEC’s allegations, the former director agreed to a 5-year D&O bar and a $175k civil penalty. It’s worth sharing this cautionary tale when you circulate your questionnaires next year.
In light of the SEC’s recent trend of tacking on “disclosure controls” violations to charges about non-financial disclosures, I was somewhat heartened to see that the recent “director independence” enforcement action reflected a settlement with the former director, but no action against the company.
It appears the company took standard steps to collect info about director relationships that might affect the “independence” determination:
– Providing a questionnaire with a non-exclusive list of relationships that could affect independence and asking both broad & specific questions to gather information,
– Instructing D&Os to “exercise great care” in providing answers (worth a shot!), and
– Giving the director the opportunity to review and comment on the proxy statement before it was published.
Alas! Although it’s still nice the company wasn’t charged with wrongdoing here, it’s a stretch to rely on this settlement for comfort that these steps will always be adequate. That’s because, in this particular case, it appears the SEC just brought charges relating to proxy disclosures under Exchange Act Section 14(a) and Rule 14a-9 (even though this disclosure had been incorporated into the company’s Form 10-K). If there were no Section 13(a) charges, a disclosure controls charge would be off the table.