This Woodruff Sawyer blog shares some helpful info on trends in officer exculpation proposals in the 2025 proxy season. Here are some notable takeaways:
– When exculpation proposals failed, high vote thresholds and low turnout were to blame. The three companies with failed proposals still received majority of votes cast. A heavily retail base contributed to this challenge.
– Many companies presented a proposal with charter amendments that contemplated “modernization of archaic language, removing references to classes of stock that have since been retired, or cleanup changes to conform with current Delaware law,” including officer exculpation.
– Proffered rationales didn’t break new ground. They included addressing rising litigation and insurance costs and an enhanced ability to attract and retain officers.
– Companies have made their disclosure clear that officer exculpation only permits exculpation for direct claims brought by stockholders. It would not eliminate officers’ monetary liability for breach of the duty of care claims brought by the company itself or for derivative claims made by stockholders on behalf of the company.
– The proxy advisors maintained their approaches to officer exculpation, with both taking a case-by-case approach, but Glass Lewis noting it would “recommend voting against such proposals eliminating monetary liability for breaches of the duty of care for certain corporate officers, unless compelling rationale for the adoption is provided by the board, and the provisions are reasonable.”
The blog shares these suggestions:
Review Your Charter Language Early. Identify whether a simple majority or supermajority threshold applies and plan accordingly.
Don’t Assume Investor Familiarity. Even with growing acceptance, many stockholders, especially retail, still require education on why officer exculpation matters. Make the case clearly and succinctly.
Bundle Wisely. Combining officer exculpation with refinements and clarifications can be effective, but avoid obscuring the proposal or diluting its rationale.
Engage Retail Shareholders. Where possible, boost turnout through proactive investor outreach and simple, accessible communications. Also, don’t feel like you need to go at it alone. Proxy solicitors are just a call away.
Be Ready to Proceed Without Proxy Advisor Support. Positive outcomes are achievable without unanimous recommendations from proxy advisors, but only with strong preparation.
Check out John’s latest “Timely Takes” Podcast featuring Cleary’s J.T. Ho & his monthly update on securities & governance developments. In this installment, J.T. reviews:
– SEC Climate Rule Update
– DOJ White Collar Enforcement Plan/SEC Enforcement
– First 10b5-1 Plan Conviction
– Consequences of Failure to Pushback on SEC Comments
– ISS and Glass Lewis litigation
As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email me and/or John at mervine@ccrcorp.com or john@thecorporatecounsel.net.
Since 1972, the SEC has had a policy that defendants settling civil claims with the Commission can’t go out afterwards and deny the allegations – which is not-so-affectionately known as the “gag rule.” As Liz shared in early 2024, the “neither admit nor deny” policy is, not surprisingly, not roundly supported by companies and other defendants. It’s also drawn criticism – on 1st Amendment grounds – from a federal court.
Petitioners in the case asked the Ninth Circuit to review the SEC’s denial of a request to amend Rule 202.5(e) to eliminate the provision prohibiting a defendant from denying the SEC’s allegation in a settlement. Because the petitioners were not challenging the application of the Rule to any specific factual scenario, the Court framed the challenge as a facial one. The Court, therefore, could only rule in favor of the petitioners if Rule 202.5(e) would be unconstitutional in all or most of its applications.
Applying the Supreme Court’s framework from Town of Newton v. Rumery, 480 U.S. 386 (1987), the panel concluded that the SEC’s policy is not facially invalid, principally because settling parties may voluntarily waive certain constitutional rights, including their First Amendment rights. The Court pointed out that Rule 202.5(e) applies only when a party agrees—voluntarily—not to deny the SEC’s allegations as a condition of settlement. It also relied on the limited scope of the SEC’s potential remedy for a breach, which is to return to court to ask that the court reopen the case, as providing an additional safeguard against misuse of the Rule. The Ninth Circuit’s holding aligns with the Second Circuit, which has also held that Rule 202.5(e) does not violate the Constitution.
However, the Court left open the possibility of as-applied challenges and took issue with some more expansive language in SEC settlements.
Although the Court rejected the facial challenge, it pointedly declined to immunize the Rule against future attacks. It noted that First Amendment concerns “could well arise in a more particularized, as-applied type of challenge.” For instance, if the SEC were to enforce the Rule in a way that chilled general criticism of the agency, courts may find such applications unconstitutional. In fact, the Court stated that one of the rationales put forth by the SEC in support of the Rule—that “it is necessary to silence defendants in order to promote public confidence in the SEC’s work”—would be an improper rationale in light of the “robust First Amendment protections for speech critical of the government.”
The panel also noted troubling language in some SEC settlement agreements that potentially extend beyond the Rule—for example, prohibiting defendants from making statements that merely “create the impression” that the SEC’s allegations or findings lack a factual basis or from “permitting” others to speak on their behalf. The Court explicitly left open the possibility that these broader restrictions could fail under future legal scrutiny. Additionally, the Court left open the possibility of challenges to the Rule’s unrestricted time period: “[n]or do we decide if it would be constitutional for the facial restrictions in Rule 202.5(e) to apply in perpetuity.”
On LinkedIn, Scott Mascianica says a defendant’s decision may not be as “voluntary” as it seems.
[F]ighting the SEC or settling with the agency can be a “Hobson’s choice” for individuals and entities: dig in and continue to face a financial crippling investigation or litigation OR settle and give up your right to deny the allegations against you. There is no door #3.
For many parties embroiled in SEC investigations or litigation, there is the appearance of a voluntary choice when it comes to resolving matters. In reality, for many, the only option available is to settle on terms set by the agency. Such settlements preclude a settling party from denying the allegations in the charging document; instead, the settling party is limited to stating that they neither admit nor deny the allegations.
He is quick to note not to blame SEC enforcement attorneys for these settlement terms — “their hands are tied by the rule.”
In a recent Delaware Chancery opinion,Kim, et al. v. FemtoMetrix, Inc. (Del. Ch.; 8/25), Vice Chancellor Will addressed the enforceability of a voting agreement amendment. She found the amendment was allowed under the terms of the voting agreement even though it altered a party’s right to designate a director without its consent. Law Prof Ann Lipton (now of the University of Colorado Law School) blogged about the decision last week:
Avaco was a stockholder in FemtoMetrix, and had signed a voting agreement with other stockholders. That agreement gave Avaco the right to designate one director, and it chose Kim, who was then an Avaco employee. The voting agreement had the following relevant terms:
Section 1.2(a) granted Avaco had a designation right, subject to sections 1.6 and 1.4(a) . . . Section 1.4(a) provided that Avaco’s designee could be removed without Avaco’s approval, but only for “cause.” Section 7.8 provided that amendments to the voting agreement required a stockholder vote, but an amendment specific to a particular investor – that did not “appl[y]” to all equally – would require that investor’s consent. It also provided that Section 1.2(a) could not be amended without Avaco’s consent.
FemtoMetrix and Avaco also had a commercial relationship and, for whatever reason, that relationship soured and Avaco filed a lawsuit against FemtoMetrix. To “prevent Avaco from obtaining sensitive information while the parties were embroiled in litigation,” the company and certain stockholders entered into an amendment to the voting agreement that did not revise Section 1.2 containing Avaco’s designation right, but revised Section 1.4 in a way that effectively prevented Avaco from exercising that designation right.
Specifically, they amended section 1.4 by adding a new subsection, (d), defining a “conflicted director” to mean a director who is affiliated with an entity engaged in commercial litigation against FemtoMetrix, and they amended 1.4(a) to define “cause” to reference the new 1.4(d). They also added a new Section 1.7, preventing stockholders with designation rights from appointing conflicted directors. FemtoMetrix then kicked Kim off the board, Avaco sued, and the two sides moved for summary judgment.
The company claimed that, in all respects, it complied with the voting agreement. Section 1.2(a) had not been amended at all, so Avaco’s consent was not required. The other sections had been amended, but – because they applied equally to all investors – Avaco’s consent was still not required.
Ann points out:
Avaco previously had a designation right, unrestricted except for SEC bad actors, and now it didn’t! Avaco’s director previously could only be removed for “cause” – which as a background concept usually means misconduct of some kind – and now could be removed for other reasons! And of course the amendment was limited to Avaco; the investors chose an Avaco-specific quality and targeted the amendment to that quality.
But Vice Chancellor Will found this to be copacetic under the strict language of the voting agreement and granted summary judgment.
Avaco was protected against amendments to Section 1.2(a), and the actual words that were changed appeared in Sections 1.4 and 1.7 . . . As for whether the amendments concerned a specific investor – they were phrased in general terms, so those were okay too! Any investor engaged in commercial litigation against FemtoMetrix would have received the same treatment . . . The contract required equal application of a contract amendment; not equal effect. The fact that the amendment had a disparate effect (and was clearly intended to have a disparate effect) played no part in the analysis because the agreement only guaranteed against disparate application.
In mid-July, we ran a reader quick poll asking: “What’s your least favorite S-K item?” The results are in! Item 402 is the Regulation S-K item our readers most love to hate. In a narrow victory, Item 402 beat out my least favorite, Item 305, by 1%! This just underscores that the SEC revisiting the current executive compensation disclosure requirements is a welcome development!
Now that we know readers’ least favorite, I can’t help but wonder if there is a clear favorite! I’m not sure I have one myself. Maybe Item 303, because I enjoy reading MD&As, but then again, I also enjoy reading CD&As — even though I’m aligned with our readers on Item 402. I think I must just like a “discussion & analysis.”
Anyway, less about me, let’s talk about you! Do you have a favorite? Please, search your soul and take a minute to answer this quick poll.
As I mentioned in the blog a few times this week, the fact that we are transitioning from carefree summer days to back-to-school time is weighing heavily on my mind, because in about 10 days I am going to find myself back in a classroom at Georgetown Law co-teaching a course about the exemptions from registration in the Securities Act of 1933. For reasons that I cannot really explain, I always get very nervous about speaking in front of students in the classroom, even though I am very much at ease speaking to a large group of professionals at our October Conferences or at other securities regulation programs. This nervousness prompts me to over-prepare for class, even though I could probably teach the course in my sleep at this point. As part of that preparation, I am always looking for current developments that can convey to the students the state of the capital markets and the ongoing debate about how best to facilitate capital-raising. Fortunately, there has been no shortage of current events to talk about concerning capital-raising and exempt offerings over the past five years!
For example, last month, the SEC’s Office of the Advocate for Small Business Capital Formation hosted policy roundtables on reexamining the IPO on-ramp and reassessing the framework for small public companies. During these roundtables, the panelists discussed how to improve the IPO process to encourage companies to go public, as well as potential changes that would encourage more companies to stay public. The video and transcript for the panel “IPO Policy Roundtable: Reexamining the IPO On-Ramp” and the video and transcript for the panel “Small Cap Policy Roundtable: Reassessing the Framework for Small Public Companies” are now available on the SEC’s website, so check them out today.
On Wednesday, the U.S. District Court for the Central District of California denied a motion for preliminary injunction seeking to halt enforcement of California’s SB 253 (the Climate Corporate Data Accountability Act) and SB 261 (the Climate-Related Financial Risk Act) on First Amendment grounds. As this Fenwick alert notes:
With respect to SB 253, the district court found that plaintiffs did not show a likelihood of success on the merits based on California’s dual interests in providing investors with reliable information on which to make investment decisions and in reducing emissions (while acknowledging that California’s interest in providing reliable information to investors may not be justified to the extent the law compels disclosure form companies that have no California investors).
With respect to SB 261, the district court found that California made a sufficient showing as to benefits of investors’ desire for the specific disclosures required by SB 261 to achieve the legislature’s objective in reliable information that enables investors to make informed judgments about the impact of climate-related risks on their economic choices.
The district court also found that the plaintiffs had not shown irreparable harm (due to their failure to show how the climate laws violate the First Amendment) and that “the balance of equities favors denial of plaintiffs’ motion,” primarily because “enjoining SB 253 and 261 would delay the State from advancing the public interests for which it adopted the laws.”
So, for now, the litigation will continue as the deadlines for reporting under the climate laws draw closer.
SB 261 contemplates reporting as of January 1, 2026, while the California Air Resources Board (CARB) is still working on regulations that will establish when 2026 reports are due under SB 253.
The latest issue of The Corporate Counsel newsletter has been sent to the printer. It is also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format. The issue includes the following articles:
– Noisy Exits: Navigating Director Disagreement Resignations
– Offerings During Blackout Periods: Disclosure Considerations for “Flash Numbers”
Please email info@ccrcorp.com to or call 1.800.737.1271 to subscribe to this essential resource.
The SEC announced yesterday that it launched a new statistics and data visualization page that “includes statistics and graphics on key elements of the capital markets, such as initial public offerings, exempt offerings, corporate bond offerings, reporting issuers, municipal advisors, transfer agents, and household participation in the capital markets.” The announcement notes:
The webpage provides statistics presented in time series charts to show market trends, pie charts to show distribution across different categories, as well as heat maps to show geographic distributions. The visuals are interactive, allowing the public to explore the information in which they are interested.
“I have long believed that greater transparency is essential to serving the public effectively, and this new webpage is another step toward making our work more accessible,” said SEC Chairman Paul S. Atkins. “This new statistics page provides an unprecedented window into the capital markets. I am pleased that the SEC has launched this effort to put vital information into the hands of investors, market participants, and the public.”
“This page offers users the ability to explore information about the market and follow how that information has changed over time,” said Dr. Robert Fisher, Acting Chief Economist and Director of the Division of Economic and Risk Analysis. “These data will enable a better understanding of what is happening in the markets.”
The new webpage includes:
– Data Visualizations: interactive graphics based on statistics
– Statistics Table: fundamental statistics regularly updated with the most recently available data
– Statistics Guide: description, calculation method, and data source for each metric
– Statistics Download: all available statistics in the table and data visualizations
– Related Materials: research and reports, regulatory background, investor bulletins, or additional resources
The new webpage can be found on the SEC’s website under Data & Research.
I encourage you to take a spin through this new site, the information is interesting. I suspect that I might share some of this information with my students this Fall, because it provides some interesting context regarding the utilization of various securities offering exemptions.
We are almost two months away from 2025 Proxy Disclosure Conference, which is taking place at The Virgin Hotels in Las Vegas and by webcast on Tuesday, October 21. I look forward to gathering with the other “SEC All-Stars” for the panel “The SEC All-Stars: Proxy Season Insights,” which the agenda notes will take place from 8:50 – 9:50 a.m. local time. I have been putting pen to paper to prepare what I will talk about and here is a sneak peek:
– The SEC’s new priorities under the leadership of Chairman Paul Atkins;
– The impact of deregulatory Executive Orders on SEC rulemaking;
– The status of the climate disclosure litigation;
– Key SEC actions regarding shareholder proposals and shareholder engagement;
– The future of cybersecurity disclosure;
– The SEC’s focus on executive compensation disclosure;
– Regulatory priorities for the capital markets; and
– The evolution of crypto asset regulation.
My remarks will only scratch the surface on these topics, and then our panels throughout the day and during the 22nd Annual Executive Compensation Conference on the following day will delve into the details.
You will not want to miss this year’s Proxy Disclosure Conference! You can sign up online or reach out to our team to register by emailing info@ccrcorp.com or calling 1.800.737.1271.
