Last week, ISS announced that it would halt consideration of gender and racial and/or ethnic diversity of a company’s board when making vote recommendations on director elections. After the announcement, a common question was: “What will Glass Lewis do?”
This Fried Frank memo says Glass Lewis sent a letter to its clients yesterday stating that it is re-evaluating its DEI-related voting guidance in light of the Administration’s approach. Here’s more:
The letter states that, in light of the Administration’s views on DEI, Glass Lewis “may in fact determine that it is in our clients’ best interest for Glass Lewis to change its approach to voting guidance on board elections and DEI-related shareholder proposals at U.S. companies, particularly in areas where this guidance considers gender, ethnic, and racial diversity of the board.” The letter states, with respect to institutional investors who “remain committed to diversity”: “We will do our best to support your voting preferences, but ask you to understand that may not be fully possible in the end.” Glass Lewis states that it “will spend the next two weeks gathering input from clients” and will issue new guidance on March 3, 2025, following the DOJ’s issuance of its report.
That last sentence refers to the Attorney General’s February 5th memo that directs the Civil Rights Division and the Office of Legal Policy to jointly submit a report with specific recommendations for discouraging private sector “illegal DEI” by March 1st.
This isn’t the only update to board diversity considerations since ISS’s announcement. Reuters reported that Goldman Sachs has also ended its four-year-old policy of only taking companies public if they had two diverse board members.
Yesterday, on DealLawyers.com, I blogged about Senate Bill 21, which was introduced in the Delaware Senate Judiciary Committee on Monday. The bill proposes sweeping changes to the DGCL that — like last year’s amendments — would override certain existing case law. This CLS Blue Sky blog by law professors Eric Talley (Columbia), Sarath Sanga (Yale) and Gabriel V. Rauterberg (University of Michigan) says, “if adopted, these measures would mark the most significant single-year revision of Delaware’s corporate code since at least 1967” and notes that the proposed changes cut “across foundational doctrines—controller conflicts of interest, derivative litigation, access to corporate records.” Plus, a concurrent Senate Resolution requested that the Council of the Corporation Law Section recommend legislative action on attorney’s fee awards.
As I noted on DealLawyers.com, the bill is notable in both substance and process. The blog says, “most striking of all is the speed with which this is happening—circumventing the usual measured processes of the Delaware Bar’s Corporation Law Council and the typical stakeholder buy-in.” There’s also speculation on LinkedIn that the proposed changes might be approved as soon as this spring — not in the usual August timeframe.
In the following two blogs, I’ll share a summary of key changes to DGCL Sections 144 and 220. Memos already started rolling in yesterday, and we’re posting them in our “Delaware Law” Practice Area. Check that out for more info!
As you’ll see in the subsequent blogs, the bill would make massive changes to Delaware’s approach to reviewing controlling stockholder transactions and attempts to narrow and define some related concepts involved in reviewing the fairness of transactions with a controlling stockholder — including what constitutes “independence” for the directors that approved or recommended the transaction. Even before this bill, director independence was already getting a lot of attention — after the SEC’s settlement with a public company director due to his failure to disclose his close personal friendship with an executive officer and the Delaware Chancery Court’s Tornetta decision.
This will be one of many topics addressed in our upcoming webcast “Director Independence: Recurring Issues and Recent Developments.” Join us on Wednesday, March 5, at 2 pm ET to hear Skadden’s Caroline Kim, Gunster’s Bob Lamm, Davis Polk’s Kyoko Takahashi Lin and Morris Nichols’s Kyle Pinder discuss recurring issues, recent developments and some common scenarios. Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. 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.
Newly introduced Delaware Senate Bill 21 would, if adopted, make significant changes to Section 144 of the DGCL to more narrowly define key concepts from case law and create a safe harbor for corporate transactions with controllers (other than going private transactions). Here’s more from this CLS Blue Sky blog:
Overturning Match Group: Lowering the Standard for Controller Transactions. Under Match Group, all controlling stockholder transactions must satisfy all six MFW procedural protections—or face entire fairness review. The proposal rewrites that rule: It applies MFW only to so-called “controller takeovers” (mirroring the original MFW), and even then jettisons crucial MFW features such as full independence of the committee and ab initio In practical terms, going-private deals no longer need to be conditioned on both cleansing mechanisms from the outset, and the committee need only be “majority disinterested” (explained below). For all other controlling-stockholder transactions, the standard is also lowered: (a) The special committee does not have to be fully independent, only “majority disinterested.” (b) The stockholder vote counts only votes actually cast, so abstentions do not act as opposition. (c) Either committee approval or stockholder approval suffices—no need to secure both. This is a major departure from Match Group and fundamentally reduces the scrutiny applied to controller transactions.
Defining “Controlling Stockholder” with a 33.33 percent Threshold. Delaware courts have recognized controllers below 33.33 percent when they exert “actual control.” The proposal imposes a bright-line rule: A stockholder is a controller only if the stockholder owns a majority or holds at least one-third plus managerial authority equivalent to a majority owner. This will exclude some major stockholders (20–33 percent) from controller scrutiny, even if they exercise significant influence. Notably, it undermines cases like Tornetta v. Musk(2024), where Elon Musk was deemed a controller at just 21 percent. Under this rule, he would not have been classified as a controller at all.
Presumption of Independence for Exchange-Listed Directors. A director deemed independent under NYSE/Nasdaq rules is now presumed disinterested unless strong, particularized evidence proves otherwise. Additionally, a director’s nomination by an interested party does not, by itself, suggest the director is interested. This directly counters cases like Goldstein v. Denner, where a director’s controller-backed nomination played a key role in determining that the director wasn’t independent. This change makes it harder to challenge director independence.
“Fair as to the Corporation” Defined. The proposal defines fairness as a transaction that provides a benefit to the corporation or stockholders and is comparable to what might have been obtained in an arm’s-length deal. This codifies the two-pronged fairness test (fair price + fair process) but lacks detail compared with decades of entire fairness jurisprudence. It leaves open several questions: How “comparable” must the deal terms be? What evidence satisfies this? Courts will likely need to interpret these gaps in future litigation.
New Definitions of “Material Interest” and “Material Relationship.” For directors, a material interest or material relationship is anything that reasonably impairs their objectivity. For stockholders, it’s defined more broadly as anything material to them personally. This replaces the fact-intensive, contextual analysis of director independence from Beam v. Stewartand In re Oracle with simplified statutory definitions. Courts may now be less willing to find conflicts unless the impairment is explicit and significant. This could potentially limit challenges to board independence.
Newly introduced Delaware Senate Bill 21 would, if adopted, also rework Section 220 of the DGCL governing books & records requests. Here’s the CLS Blue Sky blog‘s summary of those key changes:
Narrowing the Scope of “Books and Records” Requests. The proposal limits what qualifies as corporate “books and records” under DGCL Section 220 to a specific, exhaustive list—charters, bylaws, stockholder meeting minutes, communications to stockholders, board minutes, board materials, annual financial statements, and agreements under Section 122(18). This restricts what stockholders can request in a 220 demand, potentially excluding emails, text messages, or informal board communications, which have become central to derivative litigation.
Imposing a Three-Year Lookback Period. Stockholder access to records is now capped at three years—meaning any demand can only cover documents created within that timeframe. This limits the window for stockholder investigations, particularly in long-running governance disputes or cases where corporate misconduct surfaces years after the fact.
Raising Procedural Hurdles for Stockholder Demands. The amendments impose stricter procedural requirements: A demand must state a proper purpose, describe it with reasonable particularity, and show that the requested materials are “specifically related” to that purpose. This raises the bar for shareholders seeking information, giving corporations more grounds to resist requests by arguing they aren’t narrowly tailored or don’t meet the heightened standard.
Allowing Corporations to Impose Confidentiality Restrictions. Corporations can now mandate confidentiality for produced records and require shareholders to incorporate them by reference in any lawsuit based on the demand. This discourages fishing expeditions and limits strategic use of 220 materials.
Courts Retain Some Discretion—But With Constraints. The proposal confirms that courts can still compel production in litigation or impose reasonable limits—but only if the stockholder meets the new statutory requirements. This preserves some judicial oversight but signals to the Court of Chancery that Delaware wants to tighten stockholder access, which could change how courts approach 220 disputes going forward.
As you finalize your 10-K, it’s worth taking a look at this Goodwin blog with takeaways from a subset of the largest early filers. On the topic of compliance with Item 408(b), the blog notes that there’s no uniform approach to the location of the insider trading policy disclosure — slightly over half incorporated it by reference to the yet-to-be-filed proxy statement and the rest described in the 10-K. The blog suggests that companies consider existing proxy disclosure regarding the insider trading policy and whether expanding that is appropriate. But note that the policy itself must be filed as an exhibit to the Form 10-K.
For companies that included it in the Form 10-K, the blog provides two approaches — depending on whether the company’s policy applies to the company’s trading itself:
Disclosure Example 1: If the Company’s Insider Trading Policy applies to the Company’s trading:
The Company has adopted an insider trading policy that governs the purchase, sale, and/or other transactions of our securities by our directors, officers and employees and the Company itself. A copy of our insider trading policy is filed as Exhibit 19.1 to this Annual Report on Form 10-K for the fiscal year ended December 31, 2024.
Disclosure Example 2: If the Company’s Insider Trading Policy does not apply to the Company’s trading:
The Company has adopted an insider trading policy that governs the purchase, sale, and/or other transactions of our securities by our directors, officers and employees. A copy of our insider trading policy is filed as Exhibit 19.1 to this Annual Report on Form 10-K for the fiscal year ended December 31, 2024. In addition, with regard to the Company’s trading in its own securities, it is the Company’s policy to comply with the federal securities laws and the applicable exchange listing requirements.
The blog also addresses how 10-Ks so far have addressed disclosures regarding the change in the U.S. presidential administration, DEI and cybersecurity.
In mid-December, the AICPA & CIMA held a conference where representatives from the SEC, FASB and PCAOB shared their views on various accounting, reporting, and auditing issues. BDO recently released this helpful “highlights” document with a few hidden gems for public company advisors.
One such gem is the discussion of trends and best practices when submitting a waiver request related to financial statements of acquired businesses. The number of waiver requests has continued to trend downward since the SEC’s 2020 overhaul of the rules governing the financial information that public companies must provide for significant acquisitions & divestitures. But this topic is still frequently the subject of waiver requests and interpretive questions, and the Staff highlighted the following common issues:
– Anomalous results from the significance tests when a business is acquired
– The use of abbreviated financial statements in certain transactions that do not otherwise meet the criteria for their use in S-X Rule 3-05(e)
– The conclusion under S-X Rule 11-01(d) about whether the acquired entity meets the definition of a business
The Staff reminded attendees that:
– The definitions of a business under U.S. GAAP (or IFRS) and the SEC’s rules are different
– There is a presumption that a legal entity constitutes the acquisition of a business under S-X 11-01(d)
– Revenue is not required to meet the definition of a business (for example, the acquisition of a pre-revenue life science or technology entity may also meet the definition of a business)
They also provided these best practices for submitting waivers:
– Provide all relevant details of the significance tests and consider providing their actual calculations.
– Consider including an alternative request if the SEC staff does not agree with the registrant’s initial position. For example, registrants may consider including a waiver request for the historical financial statement requirements of an acquired entity if the SEC staff disagrees with a registrant’s conclusion that the acquired entity does not meet the SEC’s definition of a business.
– Involve all relevant stakeholders when drafting the letter, including the external auditor and its National Office, who possess technical experience and can assist with navigating interactions with the SEC staff.
– Carefully consider who the primary point of contact will be if the SEC staff reaches out to the registrant for clarification. The SEC staff encourages registrants to select an individual who can speak to the facts of the transaction as well as someone who understands the relevant rules and accounting guidance.
Side note: This is one topic for which I used to regularly reference the Financial Reporting Manual. If you don’t deal with this often and are told to check there, keep in mind that the discussion on acquired company financial statements in the FRM hasn’t been updated since before the 2020 overhaul.
Calendar year-end companies will soon be filing their first disclosures addressing new Item 402(x)(1), which requires a description of policies and practices related to the timing of option & SAR grants and the release of MNPI. Companies must address how the board decides when to grant (do they follow a predetermined schedule?), whether the board or compensation committee considers MNPI when deciding timing and terms of the options (and if so, how) and whether the company has timed the disclosure of MNPI to affect the value of executive compensation.
We know that the narrative policies and practices disclosure is required regardless of whether a company has actually made grants of option awards close in time to the release of MNPI, but one interpretive question we’ve heard pop up is what companies need to say — if anything — if they just don’t grant options or SARs at all. Gibson Dunn’s Ron Mueller addressed this in last week’s webcast, “The Latest: Your Upcoming Proxy Disclosures.” Here are a few takeaways from his talking points:
– Item 402(x) is not limited to NEOs. This requires disclosure about any option grant policy generally.
– Item 402(x) has no time limit. A lot of companies stopped granting options in the last few years — moving to performance-based awards — but they still have options outstanding. It’s unclear from Item 402(x) whether those companies need to address their policies and procedures under Item 402(x)(1).
– Item 402(x) does not address RSUs or PSUs. But some companies have written policies that apply not just to options, but also to grants of RSUs or PSUs. Many of these companies — including those that don’t grant options — have elected to discuss these equity grant policies and practices — going beyond what is required but providing helpful information. Per this Gibson Dunn alert, “although these rules apply only to options and similar awards, we expect many companies to include, or expand on existing, narrative disclosures regarding their policies and practices related to the timing of full value awards as well (i.e., restricted stock units, restricted stock, and performance stock units).”
This Troutman Pepper memo surveying early filers makes these points as well and addresses a few other topics in a Q&A format complete with sample disclosures. I especially appreciated this word of caution to not “oversell” what you do — and what you don’t do:
If, like most other issuers, you intend to write your Item 402(x)(1) narrative disclosure to describe your equity grant practices as following good governance standards, don’t oversell it. Issuers can often say (for example) that their compensation committee meetings are scheduled far in advance and generally occur after earnings are announced, and that they do not time the disclosure of MNPI for the purpose of affecting the value of executive compensation. But despite standard practices that reduce the likelihood that grants will be made when MNPI exists, such grants may nonetheless occur for a variety of reasons. For example, an issuer may consider it necessary or appropriate to grant equity to a newly hired senior executive immediately upon his or her start date. In such cases, issuers need to be able to show that the grants did not violate the practices they articulated. Moreover, to demonstrate responsible exercise of fiduciary duties in such cases, issuers may need to say that their compensation committees DID take the anticipated effects of the MNPI into account when sizing the grants.
Earlier this week, an Executive Order directed Attorney General Pam Bondi to pause DOJ enforcement of the Foreign Corrupt Practices Act for 180 days. Here’s more detail from the fact sheet:
The Order directs the Attorney General to pause FCPA actions until she issues revised FCPA enforcement guidance that promotes American competitiveness and efficient use of federal law enforcement resources.
– Past and existing FCPA actions will be reviewed.
– Future FCPA investigations and enforcement actions will be governed by this new guidance and must be approved by the Attorney General.
The Order implies that the new enforcement guidance will give U.S. companies more leeway with their global business practices. But before you get carried away with bribing foreign officials, it’s important to keep in mind that – at least for now – the SEC still has power to bring civil enforcement actions for FCPA-related violations. This Cleary Gottlieb memo gives more color on how that could play out:
It remains to be seen whether, once confirmed, Atkins will bring the SEC’s enforcement policy in-line with the DOJ’s. The SEC, which enforces the FCPA only on U.S. and foreign issuers of U.S. securities, will also need to consider the impact on investors of pausing enforcement wholesale.
In particular, the SEC enforces the books and records and internal controls provisions of the FCPA, which are codified as part of the Securities and Exchange Act, against numerous companies both inside and outside of the FCPA context to ensure that issuers have accurate books and records and reasonable internal controls over financial accounting, regardless of whether evidence of corrupt payments is established.
According to the memo, the Executive Order and a related DOJ memo create a number of open questions – and that’s part of the reason companies will still benefit from maintaining their anti-corruption compliance programs during this pause and beyond. A memo from BakerHostetler summarizes why FCPA still matters:
■ Foreign and Regulatory Anticorruption Regimes Remain Unaffected. Foreign anticorruption architecture and FCPA analogs in the UK, the EU and other major economies remain in place. The executive order also does not impact the Securities and Exchange Commission’s (SEC) FCPA civil enforcement programs, which include a robust and successful whistleblower program. Companies will still be subject to these laws and regulations.
■ Bribery Impacts the Bottom Line. Bribery often causes companies to lose money through slush funds and other undocumented expenditures that cannot be internally tracked or audited. Indeed, prior FCPA cases, such as the recent trial in United States v. Aguilar in the Eastern District of New York, show that executives may embezzle money in tandem with bribery schemes.
■ FCPA Enforcement will be Decentralized. Bondi’s memorandum lessens the gatekeeping function over FCPA cases related to cartels and TCOs and gives more autonomy to United States Attorney’s Offices (USAOs) around the country, which might undermine prior goals of consistency. While the character of FCPA cases may change, this reduced DOJ oversight and new independence for USAOs could increase overall FCPA enforcement. However, it could also lead to more inconsistent and less predictable enforcement, requiring businesses to maintain comprehensive and flexible FCPA compliance policies — especially with respect to prosecution of companies/individuals that could be considered to be aiding or transacting with cartels or TCOs as described above.
■ Other Statutes Remain Applicable. Statutes for crimes such as wire fraud and money laundering can be used in traditional FCPA fact patterns and support criminal enforcement. The False Claims Act can be used similarly in civil cases.
■ DOJ May Revisit Past Conduct. After the review period mentioned in the executive order, the Attorney General is authorized to “determine whether additional actions, including remedial measures with respect to inappropriate past FCPA investigations and enforcement actions, are warranted” and to “take any such appropriate actions.” This leaves the door open for a reexamination of past FCPA-related investigations or conduct. Companies that relax their FCPA compliance policies may find themselves vulnerable to later enforcement actions. This may be especially so with foreign companies, given President Trump’s comments about the unfair impact to date on U.S. entities.
If you’re looking for a good resource to anticipate “macro-level” questions your directors might ask you in the coming year (in addition to new regulatory reforms), Cleary Gottlieb is out with its “Selected Issues for Boards of Directors in 2025.” This year’s edition covers 13 topics over the course of 74 pages – ranging from AI, non-competes, tax risks, trade controls, disclosures about executive security and equity grant policies, enforcement, shareholder activism, Delaware issues, UK & EU capital markets, and more.
On the topic of cyber disclosures, some people are wondering whether companies will be getting more of a pass under the new regime. Earlier this week, Acting SEC Chair Mark Uyeda reiterated previous arguments against the SEC’s climate disclosure rule when directing a pause in the agency’s defense of that rule. Similar to the climate disclosure rule, Commissioner Uyeda – as well as Commissioner Hester Peirce criticized the SEC’s decision to adopt the cyber disclosure rules – and both Commissioners have also dissented from some recent cyber-related SEC enforcement actions. Unlike climate disclosure, though, the cyber disclosure rules aren’t being challenged in court. And the Cleary team suggests that although the SEC enforcement environment may shift, companies should still pay attention to how their cybersecurity risks and processes are described in public disclosures. Here’s an excerpt:
Looking to the future, the recent dissents by the Republican Commissioners indicate a likelihood of agency focus shifting to a less granular concept of materiality in disclosures. We expect the SEC will focus on situations like that in Flagstar, where there is potential for investor harm, rather than dissecting post-incident reports and company processes.
That being said, under the last Trump Administration, the SEC brought a number of blockbuster cyber incident disclosure cases against Yahoo and others, which, combined with the new rules, behooves registrants to pay attention to disclosure and related policies and procedures.
The Flagstar settlement – which the SEC announced in mid-December – involved alleged materially misleading statements about a breach. Specifically, the SEC’s order said:
This matter concerns materially misleading statements that Flagstar negligently made regarding a cybersecurity attack on Flagstar’s network between November 22, 2021 and December 25, 2021 (the “Citrix Breach”), which resulted in, among other things, the encryption of data, network disruptions, and the exfiltration of the personally identifiable information (“PII”) of approximately 1.5 million individuals, including customers, on December 3 and 4, 2021. The risk factors in Flagstar’s 2021 Form 10-K, which it filed on March 1, 2022, stated that cybersecurity attacks “may interrupt our business or compromise the sensitive data of our customers,” but Flagstar did not disclose that Flagstar had already experienced cybersecurity attacks that resulted in the exfiltration of sensitive customer data and that the Citrix Breach interrupted its business.
In a June 17, 2022 notice to customers posted on its website (“Customer Website Notice”) and a Form 10-Q filed on August 9, 2022, Flagstar also made materially misleading statements concerning the scope of the Citrix Breach and represented that there was unauthorized “access” to its network and customer data, when Flagstar was aware that the breach disrupted several of its network systems and that customer PII was exfiltrated from its network. Flagstar also failed to maintain disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
It’s worth noting that Commissioner Uyeda did not vote in favor of the order, and that Commissioner Peirce approved it with exception as to the Rule 13a-5 charge and the penalty.
If you’re covering cyber issues with your board, my blog from last month on putting board oversight of cybersecurity into action might also be helpful.
In the latest episode of our “Women Governance Trailblazers” podcast, Courtney Kamlet and I interviewed Lucy Fato, who is currently EVP, General Counsel & Corporate Secretary of Seaport Entertainment Group. People who have been in the corporate governance space for a while probably know Lucy – she’s held prominent roles at AIG and other notable companies, and started out at Davis Polk. We discussed:
1. Lucy’s career path and things that have surprised her along the way.
2. Transitioning from private practice to an in-house role, considerations for legal-adjacent roles and prerequisites to being a leading GC.
3. Behaviors and actions that allow General Counsels to support a culture of ethics & compliance while still being seen as a valuable business partner.
4. Advice for companies that want to give back to communities when there is a risk of backlash.
5. What Lucy thinks women in the corporate governance field can add to the current conversation on the societal role of companies.
To listen to any of our prior episodes of Women Governance Trailblazers, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
Programming Note: In observance of Presidents Day, we will not be publishing blogs on Monday. We’ll return Tuesday.