According to this Audit Analytics blog, “no” votes on auditor ratification proposals rose in 2020. Now, before we get carried away here, let’s start with the fact that support for these proposals is generally overwhelming – from January 1, 2018 to December 31, 2020, an average of 98% of votes were cast in favor of ratification. Still, these excerpts from the blog indicate that’s not the whole story:
– The occurrence of shareholders voting in large numbers against auditor ratification has been increasing. Over the last three years, there have been four instances when more than 40% of a company’s shareholders voted against ratification; three of those votes occurred in 2020.
– In 2020, there were 13 entities with more than 20% of shareholder votes cast against ratification. SPAR Group [SGRP], LM Funding America [LMFA], and Barnwell Industries [BRN] top this list, with more than 42% of votes against auditor ratification.
– Both SPAR Group and Barnwell Industries had previous votes where shareholders voted in large quantities against the company’s auditor. In 2019, 30.85% of SPAR Group’s shareholders voted against ratification. For Barnwell Industries, over 5% of shareholders voted against the company’s longstanding auditor in six of the last seven years. Worth noting, Barnwell Industries opted to change auditors in 2020.
Among the S&P 500, the blog says that incidence of no votes on ratification proposals is much lower. The blog includes a list of the 10 highest votes against ratification among the S&P 500, and notes that UDR (14%) and GE (11%) topped the list this year. UDR and GE were the only members of the S&P 500 with greater than 10% negative votes, and the 10th company on the list, Masco Corporation, received only a 7% vote against ratification.
Those numbers may seem low, but given the traditional levels of support for auditor ratification proposals, the blog says they are enough to “trigger a red flag.” So what do companies do in response to this “red flag”? While it is still rare for companies to change auditors in response to a large negative vote, that doesn’t necessarily mean that companies and their auditors don’t take notice. For instance, in an earlier blog, Audit Analytics cites academic research indicating that a high level of shareholder dissatisfaction with auditors leads to better audit quality.
Cooley’s Cydney Posner recently blogged this update on the status of litigation challenging California’s board gender diversity statute:
In Meland v. Padilla, a shareholder of a publicly traded company filed suit in federal district court seeking a declaratory judgment that SB 826, California’s board gender diversity statute, was unconstitutional under the equal protection provisions of the 14th Amendment. In April 2020, a federal judge dismissed that legal challenge on the basis of lack of standing.
On Monday, a three-judge panel of the 9th Circuit reversed that decision, allowing the case, now called Meland v. Weber, to go forward. The Court held that, because the plaintiff “plausibly alleged that SB 826 requires or encourages him to discriminate on the basis of sex, he has adequately alleged that he has standing to challenge SB 826’s constitutionality.”
Cydney’s blog also provides an overview of the potential constitutional issues raised by the California statute and the background of the litigation.
On Friday, the Staff issued 21 FAQs for recipients of its recent letter requesting certain companies to voluntarily provide information concerning the SolarWinds cyberattack. The FAQs provide answers to questions concerning, among other things, the scope and limitations of the “amnesty” that the Division of Enforcement is prepared to provide and how to respond to certain inquiries contained in the original letter.
Companies that received the letter should read the FAQs carefully and should also be sure to check out this blog from Perkins Coie. While the FAQs are all helpful, I think that for many companies, the Staff’s first FAQ raises the question they asked most often:
1. I received a notification from Zix Mail, is it legitimate?
The SEC uses Zix Mail service for sending encrypted messages in connection with its confidential investigations, including this one. When we send an encrypted message via Zix Mail, the recipient receives a notification message from Zix Mail. An authentic notification of a message from Zix Mail will:
i. Be sent only from sec.notification@zixmessagecenter.com
ii. Direct you to a link starting with “https://web1.zixmail.net”
The backstory here is that many companies that received the original email from the Division of Enforcement weren’t sure that it was legit, and some of them reached out to the Staff to confirm that it came from the SEC. After reading FAQ #1, can you blame them? Based on the SEC’s description of its email blast, this thing couldn’t have looked more like a phishing attempt if the Zix Mail email address had ended in “@hacker.ru”.
A few months ago, I blogged about the possibility that 13(d) reform might be on the SEC’s agenda. In a speech delivered last week, SEC Chair Gary Gensler confirmed that he has the beneficial ownership reporting rules in his sights. Here’s an excerpt:
In 1968, our Congress mandated that large shareholders of public companies disclose information that helps the public understand their ability to influence or control that company. Under current rules, beneficial owners of more than 5 percent of a public company’s equity securities who have control intent have 10 days to report their ownership.
We haven’t updated that deadline in over 50 years. Those rules might’ve been appropriate for the 1970s, but I have my doubts about whether they continue to make sense given the rapidity of current markets and technologies. I’ve asked staff how we might update these rules, including possibly shortening reporting deadlines.
Activists aren’t going to be thrilled with that development, but public companies and those who represent them are likely to continue their vocal support of a move to shorten filing deadlines. Chair Gensler went on to reference his desire for greater transparency concerning derivative swaps on individual companies that “provide exposure to the company without traditional equity ownership,” so perhaps an expansion of the definition of “beneficial ownership” under Section 13(d) to encompass these derivative positions might also be on the table.
The EDGAR system was closed on Friday, June 18th in observance of the new Juneteenth federal holiday. Since President Biden had signed the legislation only the day before, the decision to close EDGAR was made in a very short timeframe. Apparently, that resulted in a little internal confusion, and some filers who made filings after 5:30 pm on June 17th receiving a June 18th filing date. Since EDGAR was closed, that filing date doesn’t work, so on Friday, the SEC announced that those filers will have their filing dates automatically adjusted to June 21st.
The May-June issue of “The Corporate Counsel” newsletter is in the mail (try a no-risk trial). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. The issue includes articles on:
– Fun in the Summer — Navigating the Filer Status Maze
– Fighting to Keep Your Secrets — A Fresh Look at Confidential Treatment
Dave & I have been doing a series of “Deep Dive with Dave” podcasts addressing the topics we’ve covered in recent issues and we’ve just posted one for this issue. Be sure to check it out!
According to this Institutional Investor article, a new study finds that “green bonds” proved to be an attractive safe haven investment during the pandemic:
Climate-friendly debt served as a better protection against large market fluctuations than gold, as well as performing better than other environmental, social, and governance investments, according to new research from Imran Yousaf of Pakistan’s Air University, Muhammed Tahir Suleman of the University of Otago in New Zealand, and Riza Demirer of Southern Illinois University Edwardsville.
In the paper, the trio argued that green bonds were the “preferable safe haven” investment for passive investors hoping to defend their portfolios against the “uncertainty” of the pandemic. Conventional stock portfolios that included green bonds saw the highest risk-adjusted returns during the pandemic when compared against equity portfolios supplemented by gold and other ESG assets, the researchers found.
That’s the good news. The bad news is that – at least on the junk end of the spectrum – green bonds may not turn out to be so green at the end of the day. The problem is that these issuers are disclosing to investors that they may not be able to use the proceeds of the financings for the purposes that they intended. The disclosure I’ve seen is pretty robust (check out the last risk factor on p. S-23 of Dana’s recent pro supp), so investors don’t have a lot of recourse if the proceeds aren’t deployed according to plan, but that doesn’t seem to bother many of them. Here’s an excerpt from this WSJ article:
Companies that issue green bonds create frameworks specifying the use of proceeds for objectives like transitioning to renewable energy. They also hire third parties to verify that the objectives are being met. If a borrower fails verification, however, bondholders have no legal right to seek compensation. “There are no mechanisms to ensure investors that the green investment will actually occur,” said Mitu Gulati, a law professor at the University of Virginia. “The only conclusion I can draw from that is that investors don’t actually care. It’s so much eyewash.”
The article says that the risk that climate-friendly promises may turn out to be illusory wasn’t a big concern when these securities were issued exclusively by investment grade commitments with long-held commitments to stability, but now, as junk issuers enter the market, the concern is that many of them may discover that Kermit the Frog was right – it’s not easy being green.
Shareholder activists have made effective use of social media platforms in their campaigns, but corporations have been slower to adopt non-traditional channels of communications with investors. According to this Corporate Secretary article, that’s another thing that’s changed due to the pandemic. Here’s an excerpt:
Historically, shareholder activists have been better at using social media and digital communications tools to wield influence during a contested situation, with many issuers taking a conservative approach to social media and digital communications. But the pandemic has forced a greater adoption of tools such as videoconferencing and social media communications, and Bruce Goldfarb, founder, president and CEO at Okapi Partners, says he’s seeing more adoption of social media this year.
‘There were some companies that used social media as part of their IR process prior to the pandemic – especially companies that already made use of social media in their marketing and sales efforts – but investors would much more frequently file materials they had posted on social media,’ he points out. ‘More companies have recently done so, and that evolution is at least partly attributable to the pandemic.’ Goldfarb adds that he is seeing more examples of additional proxy materials being filed with the SEC this year – particularly LinkedIn and Twitter posts.
The article says that companies are increasingly open to alternative channels of communication with shareholders, and that social media could be a particularly useful tool for shareholder engagement by companies that have seen a big jump in retail investors this year (gee, who might they be referring to?), but that they need support from their advisors and outside counsel.
The May-June issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer (try a no-risk trial). It includes articles on:
– A Comparison of Public and Private Acquisitions: New Data Highlights Recent Trends in Private Company Deal Terms
– Representations and Warranties Insurance: No Longer Optional for Strategic Buyers
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
A few months ago, I blogged about the materiality standard and the hazards associated with the SEC serving up disclosure mandates designed to give investors “what they want.” But in a recent speech, Commissioner Allison Herren Lee put forward a different perspective on the materiality standard. She made several provocative comments in her speech, but to me the most striking was her statement that “[f]inally, investors, the arbiters of materiality, have been overwhelmingly clear in their views that climate risk and other ESG matters are material to their investment and voting decisions.”
I think Commissioner Lee is pushing the envelope here. Investors are not “the arbiters of materiality” under the securities laws. Instead, materiality is determined by a third party’s assessment of whether information would be significant to a hypothetical “reasonable investor” in making an investment decision. It’s an objective test, and it contemplates a very different inquiry from one that focuses on the subjective assessments of a particular investor or group of investors.
Don’t take my word for this – in the Reg FD adopting release, the SEC itself said that “materiality is an objective test keyed to the reasonable investor. . .” Prioritizing subjective and potentially agenda-driven investor statements about desired disclosure mandates isn’t a great fit with a purportedly objective standard. But such an approach would make it easier to avoid the need to show some financial consequences to public companies or the value of their stock before information could be regarded as material, and that may help explain its attraction to ESG disclosure advocates.
Financial considerations have always been fundamental to the materiality concept under the securities laws. After all, it’s a reasonable investor test and not a reasonable person test. I think this is where things get a little squishy with ESG disclosure. It’s indisputable that an issue like climate change will impose substantial costs on society as a whole. But it’s less clear that it will have a significant financial impact on most businesses and the value of their securities. In fact, a 2018 IPCC publication stated that “for most economic sectors, the impact of climate change will be small relative to the impacts of other drivers.”
For a financial regulator like the SEC, that discrepancy between societal costs and costs to public companies and markets creates a potential disconnect, the implications of which Commissioner Roisman highlighted in a recent speech:
It seems that some of the interest, particularly in “E” and “S” disclosures, is not in what risks environmental or social factors pose to the company, but rather what risks the company poses to, for example, the climate. To the extent that the interest is in understanding risks the company poses to the climate, what makes the SEC the appropriate federal government agency to require these disclosures, as opposed to, for example, the Environmental Protection Agency?
In a draft article submitted in response to the SEC’s request for comment on climate change disclosures, UVA law profs Paul and Julia Mahoney argue that the SEC is not the right agency to mandate ESG disclosures. They contend that the push for disclosure is being led by institutions whose purpose is in part “to pursue public policy goals outside the normal political process,” and whose statements asserting the supposed financial value of ESG are “cheap talk that conveys no information other than that the institution wants the SEC to require the disclosures.” What’s more, the article says that by doing so, the SEC “risks eroding public trust in its capacity and willingness to serve as an apolitical, technocratic regulator of the capital markets.”
