Speaking of activism, we’ve posted our latest “Understanding Activism with John & J.T.” podcast. This time, J.T. Ho and I were joined by Kai Liekefett, who co-chairs Sidley’s Shareholder Activism and Corporate Defense practice. Kai’s practice focuses exclusively on shareholder activism campaigns, proxy fights and hostile takeovers, and over the past five years, he’s defended over 150 proxy contests globally and approximately 25% of all U.S. late-stage proxy fights, more than any other defense attorney in the world.
Topics covered during this 26-minute podcast include:
– Why many activists supported Donald Trump over Kamala Harris
– What changes to the SEC’s approach to proxy advisor regulation, UPC, and Rule 14a-8 might mean for activism
– Implications of potential changes in the antitrust merger review and enforcement environment
– Impact of disruptions resulting from tariffs and other unconventional economic policies
– Potential changes in companies targeted for activism and activist tactics
Note that during the podcast, Kai comments on the implications of a new SEC chair on the agency’s approach to activism. We recorded this podcast on November 22, 2024, prior to President-Elect Trump’s appointment of Paul Atkins to serve in that capacity.
Our objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We’re continuing to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!
The 5th Circuit hasn’t exactly been a friendly jurisdiction for the SEC in recent years, but yesterday, in National Center for Public Policy Research v. SEC, (5th Cir.; 11/24), the Court rejected a conservative advocacy group’s challenge to the legality of the SEC’s Rule 14a-8 no-action letter process. Here’s an excerpt from Bloomberg Law’s article on the decision:
A federal appeals court on Thursday left in place the SEC’s power to referee which shareholder proposals companies allow on their annual meeting ballots, tossing a case from business and right-leaning groups fighting the agency’s influence.
The Securities and Exchange Commission issued non-binding guidance that fell outside of judicial review when it advised supermarket chain Kroger Co. it could block a vote on a conservative organization’s antidiscrimination proposal in 2023, the US Court of Appeals for the Fifth Circuit ruled. Companies looking to keep shareholder proposals they consider repetitive or disruptive to their business off their ballots usually seek SEC guidance. The SEC can sue if companies bar votes without adequate justification.
The Fifth Circuit is the first court to formally weigh in on whether the SEC’s advice is a formal commission order as corporate attacks on the refereeing system have increased under SEC Chair Gary Gensler, who in 2021 made it easier for investors to file environmental, social, and governance proposals.
The Court’s ruling that the SEC’s no-action process under Rule 14a-8 did not involve a formal SEC order subject to judicial review under the Administrative Procedure Act was actually an alternative basis for dismissing the plaintiff’s claim. The Court also held that the claim was moot, since Kroger ultimately included the proposal in its 2023 proxy statement.
Almost every PCAOB statement on auditor responsibilities is something that’s worth sharing with audit committees, and the PCAOB staff report issued earlier this week on auditors’ responsibilities for detecting, evaluating and communicating illegal acts is no exception. This excerpt from the intro summarizes those responsibilities:
Under federal securities laws, auditors have a longstanding responsibility to (1) detect illegal acts; (2) evaluate information indicating that an illegal act has or may have occurred; (3) determine whether it is likely that an illegal act has occurred, and, if so, to consider the possible effect of the illegal act on the financial statements of the company; and (4) make appropriate communications about illegal acts, unless “clearly inconsequential,” to management, the audit committee, and possibly the United States Securities and Exchange Commission (SEC). PCAOB standards include similar requirements. These responsibilities also inform the auditor’s obligation to plan and perform the audit to obtain reasonable assurance that the company’s financial statements are free of material misstatement, whether due to error or fraud.
The report goes on to provide detail concerning the kinds of procedures that auditors should perform in order to appropriately discharge each of these enumerated responsibilities. The report also addresses the circumstances in which an illegal act may require the auditor to issue an adverse opinion on the financial statements, disclaim an opinion altogether, or withdraw from the engagement.
The latest issue of The Corporate Executive newsletter has been sent to the printer. It is also available now online to members of The CorporateCounsel.net who subscribe to the electronic format. In this issue, Dave takes a deep dive into clawbacks with an article titled “Clawback 2.0: What’s Next for Compensation Recovery Policies?” Here’s an excerpt from Dave’s discussion of implementation considerations for Exchange-compliant clawback policies:
In most cases, companies have tasked the compensation committee with board level oversight of the clawback policy, and compensation committee charters should be revised to clearly identify this responsibility. Even though the terms of the clawback policy are fixed by Rule 10D-1 and the relevant exchange’s listing standards, it is advisable to review the clawback policy at least once a year to determine whether any regulatory or other developments would require any revisions to the policy.
A key consideration for companies and compensation committees going forward is the fact that many policies adopted in response to the exchange listing requirements left some matters for determination when a recovery analysis is required, and it may be appropriate to review those matters before a triggering event happens to determine how the company will respond in the event of a restatement.
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Over on Cooley’s “The Governance Beat” Blog, Broc recently offered some thoughts on how companies should approach their shareholder engagement programs. This excerpt has some advice for companies that are just getting started:
If you’re just starting your first off-season engagement program, during your initial engagement, you should ask the investor about their engagement preferences (e.g., what time of year, how frequent, what topics and who they like to attend calls).
Some companies start with a list of their top 50 – or maybe it’s only 25 – shareholders. Newly public companies may start with just a handful of institutional investors because founders and venture capitalists still have significant holdings and their investor base hasn’t matured yet. The number will vary at each company – and perhaps over time – depending on the issues that the company faces, as well as the current level of resources at the corporate secretary’s department. If there are important issues on the year’s meeting ballot, the company might hire a proxy solicitor to help bring in the vote.
They look at that group of top shareholders and try to reach out to all of them over the course of the year. Each company will have a smaller subset of important shareholders and prioritize those engagements.
Broc says that the investors are in that smaller subset might include shareholders with a smaller stake who are vocal on issues that are crucial to the company – whether those are issues that management cares deeply about or issues where others are likely to follow the lead of the vocal shareholders.
He also notes the importance of engaging with investors who have reached out to the company on governance or ESG issues, and reminds companies that engagement isn’t only phone calls or online or in-person meetings. Many investors reach out through letters, and smart companies make sure to have a process to direct these to the appropriate person for a response.
A recent White & Case memo reviews the SEC’s enforcement sweep targeting delinquent beneficial ownership reports and provides insight for public companies and their insiders on the lessons to be learned from those enforcement actions. Here’s an excerpt with a couple of pieces of specific advice :
For public companies and investors, confirm that the legal and/or compliance team responsible for filings understands the Section 13 and Section 16 reporting requirements. Section 13 and 16 reporting can be complex, and it is important that those responsible at public companies or investors are well educated on the nuances of these requirements, to avoid missing necessary filings. For example, in one case, the investments at issue were managed by a business unit of the investor that did not typically invest in public equities, and the unit’s internal processes did not timely identify the need to make the required filings.
Steps should be taken to ensure that all relevant personnel are educated regarding their obligations under, as applies depending on the public company or investor’s profile, Section 13(d), 13(g), 13(f), 13(h), and/or 16(a) filing obligations. This could include brokers, financial advisors and estate planning advisors who may assist the insiders in their transactions involving company securities, as these professionals may be unfamiliar with these requirements. In addition, make sure that anyone involved in these filings is aware of the new Schedule 13D and 13G filing deadlines.
For public companies specifically, ensure your Item 405 disclosures comply with the requirements. The SEC has turned its focus to correct Item 405 disclosures. As a reminder, Item 405 disclosure in Form 10-Ks or annual meeting proxy statements of any late filings or known failures to file must (i) identify by name each insider who failed to file on a timely basis any Forms 3, 4, or 5 during the most recent fiscal year or prior fiscal years and (ii) set forth the number of late reports, the number of late reported transactions, and any known failure to file. As highlighted in the recent enforcement actions, the disclosure must identify all of the late-reported transactions, not just the number of late reported filings.
Other lessons in the memo include the need to confirm and continue to track insiders’ beneficial ownership holdings through D&O questionnaires and by monitoring equity award grant and vesting dates, and to ensure robust internal controls around potential filing triggers.
Some SEC filings are required to be signed by a company’s “principal accounting officer” – but does that mean that every company must have a person designated as a PAO? Perkins Coie’s Benjamin Dale addressed that question in a recent blog:
The PAO is a designation that is often held by a company’s controller or chief financial officer (CFO). Sometimes the PAO designation is held by someone who is not the controller or CFO. But is a PAO technically required?
Rule 16a-1 of the Exchange Act is instructive and defines an officer as the “principal accounting officer (or, if there is no such accounting officer, the controller)” (emphasis added). Under Rule 16a-1, if a company does not have a PAO, then the controller is deemed to fill that role and is considered a Section 16 officer. It’s possible for the controller to be a Section 16 officer and not otherwise be treated as an “executive officer” under Rule 3b-7 of the Exchange Act if the controller doesn’t have a policy-making function.
Ben points out that Nasdaq and NYSE rules also don’t explicitly require companies to have a PAO and treat the controller as the PAO and an executive officer for purposes of the clawback listing standards. He also notes that companies should check their bylaws in order to determine whether those require it to appoint a person to serve in that capacity.
Both presidential candidates said warm & fuzzy things about crypto this year, but Donald Trump went all-in on courting the crypto vote, even pledging to launch a “national crypto reserve.” Anyway, with the end of the SEC’s unrelenting onslaught in sight, crypto industry backers believe that Trump’s return to power will make 2025 their “Year of Jubilee.”
Earlier this year, the crypto industry achieved a milestone when the House passed the Financial Innovation and Technology Act. However, prior to the election, that legislation faced dim prospects in the Senate. This excerpt from a recent Wired article suggests that the industry’s investment in the 2024 election may have fundamentally altered the legislative landscape:
During the 2024 cycle, crypto firms donated hundreds of millions of dollars to three crypto-friendly super political action committees (PACs)—Fairshake, Protect Progress, and Defend American Jobs—the aim of which was to support crypto-friendly congressional candidates and dislodge the industry’s most vociferous critics.
The fruits of that investment became clear on Wednesday. In Ohio, incumbent Democratic senator Sherrod Brown, who is depicted as an arch-villain in crypto circles, was unseated by Republican Bernie Moreno. Through Defend American Jobs, the crypto industry spent more than $40 million in support of Moreno. Meanwhile, according to Stand With Crypto, a nonprofit pushing for bespoke crypto regulation in the US, more than 250 pro-crypto representatives have been elected to Congress.
The end of the SEC’s crackdown on crypto would be a big deal, but the crypto industry has long sought federal legislation to establish a regulatory scheme for the industry. With Republicans likely to control both the House and the Senate, the industry’s backers may be poised to finally achieve that objective.
While the crypto industry’s ultimate path to becoming a “real boy” likely lies in legislation authorizing the creation of a comprehensive regulatory framework, this Davis Polk memo provides the next SEC Chair with a “to do” list of actions that the memo says will get the regulatory ball rolling. Here’s an excerpt with some specifics:
Withdraw SAB 121, the 2022 accounting policy that requires a public company with responsibility for safeguarding crypto assets to recognize liabilities for those assets on its balance sheet. While there may be some logic to this staff-promulgated directive, the SEC is not the nation’s accounting standard-setter. That task falls to the FASB, who approaches its remit thoughtfully and with due process and broad public input as opposed to simply announcing a full-blown major GAAP policy change via press release.
Withdraw the Framework for “Investment Contract” Analysis of Digital Assets. Although well-intentioned, this 2019 staff effort has created years of confusion over the securities status of individual crypto assets. Is the crypto asset itself a security, or is it instead only a thing sold as part of a broader securities transaction? The answer to this basic question has a profound impact on all parties active in the crypto markets. But with more than sixty suggested “considerations” that supposedly make a crypto asset more or less likely to be a security, the guidance has proven impossible to interpret and apply in a manner that yields consistent results. What could help replace this guidance? See #6 below.
Place a moratorium on enforcement threats against intermediaries based on activities involving tokens they did not issue. This goes hand-in-hand with withdrawing the staff’s Framework. If a trading platform, market maker or other intermediary did not itself issue a particular crypto asset, then the intermediary did not deploy the token in a primary capital-raising transaction and its activities do not implicate the fundamental policy concerns of the Securities Act of 1933. Until we have designed and implemented a thoughtful regulatory solution, the SEC should stop harassing businesses that are meeting this vast market’s daily liquidity needs.
Stop holding up crypto company IPOs. The chair should direct the Corporation Finance staff to treat companies in the crypto asset industry trying to go public just like companies in every other industry—and provide comments on a regular timetable that will facilitate the company’s ability to go public in 3 to 4 months, rather than 3 to 4 years (or never).
Other recommendations include exercising prosecutorial discretion for registration violations not involving fraud and publishing the Staff’s Howey analysis for bitcoin and ether.
Our colleague Meaghan Nelson has been blogging up a storm over on “The Mentor Blog”, which is available to TheCorporateCounsel.net members. Since she started in late September, Meaghan’s been sharing insights and advice to help you move forward in your career based on her own diverse experiences in the legal profession. For example, here’s Meaghan’s four-part series on how to network:
If you’re a member of TheCorporateCounsel.net you can subscribe to receive the latest from Meaghan by simply inputting your email address on the left side of that blog. Not a member? We can fix that – you can subscribe online, by emailing sales@ccrcorp.com – or by calling us at 800.737.1271.
