Over on LinkedIn, Prof. Ann Lipton has a post in which she cites a Reuters’ article on how recent moves by the SEC’s Acting Chair Mark Uyeda have shifted power from investors to the board. She says that the newly proposed DGCL amendments would amplify this shift:
The proposed changes to Delaware law represent a hard swing allocating power away from shareholders (as litigants and information seekers) to corporate insiders. In the past, Delaware has justified changes of this sort by pointing out that, unlike 40 years ago, today’s shareholder base is largely institutional and sophisticated.
But the incoming SEC has already made some opening dramatic moves to undercut the power of institutional investors (the changes to 13D reporting take my breath away), and I expect many more on the horizon, from jawboning about ESG votes to limiting proxy advisors.
So we’re seeing the same moves at the federal and state levels, namely, a recalibration to put relatively unlimited discretion back in the hands of corporate insiders.
The proposed DGCL amendments have prompted a flood of commentary from academics & practitioners, but if you’re looking to understand the background and implications of the amendments, you need to spend some time with this 21-page deep dive from Morris Nichols. (Also check out the materials I referenced in my DealLawyers.com blog this morning.)
Last month, Commissioner Peirce offered a preview of coming attractions that we might see from the SEC over the next few years. Her remarks focused more on general policy approaches than on specific regulatory initiatives. In contrast, Acting SEC Chair Mark Uyeda got down to “brass tacks” yesterday in a speech delivered at the Florida Bar’s Annual Federal Securities Institute. Commissioner Uyeda discussed potential regulatory changes affecting both private and public companies. Here are some of the highlights from his remarks:
– Enhance Retail Investors’ Ability to Invest in Exempt Offerings. Commissioner Uyeda said that he has directed the Staff to explore ways to “explore regulatory changes that enable greater retail investor participation in the private markets, whether through modifications to the accredited investor definition or otherwise, while continuing to ensure that those investors are protected against fraud and bad actors.” In addition to discussing the need to review the accredited investor definition, Commissioner Uyeda also signaled that efforts to simplify some of the regulations governing exempt offerings may also be on the table.
– Revise EGC Definition & Duration to Increase IPO Attractiveness. Commissioner Uyeda praised the JOBS Act’s creation of an on-ramp to compliance with Exchange Act reporting requirements for emerging growth companies. However, he observed that in recent years, the SEC has not provided any relief for EGCs in several new rules, including cybersecurity disclosure, the Rule 10b5-1 amendments, and the clawback rules, and has provided only limited relief to EGCs for its climate disclosure rules. Accordingly, he said that he has directed the Staff to “review the EGC definition and recommend potential changes, including how a company qualifies and the duration for which it retains the status. As part of its review, I have also requested the Commission staff to consider how EGCs could benefit from having an on-ramp to comply with certain existing disclosure obligations.”
– Review & Update Filer Status Thresholds. Commissioner Uyeda observed that the SEC’s rules on filer categories are needlessly complex and do not provide sufficient scaled disclosure benefits. As an example, he notes that a company with a $250 million public float is subject to the same disclosure requirements as a company with a $250 billion public float. That’s because the SEC hasn’t changed its “accelerated filer” and “large accelerated filer” thresholds since they were established in 2005. To make matters worse, because the smaller reporting company definition has been updated, there’s a lot of overlap, which in turn has resulted in increased complexity and compliance costs. Commissioner Uyeda says that the SEC “should be considering whether to re-align the Commission’s filer categories to reflect the size and makeup of public companies today. Following any potential re-alignment, the Commission should also review its disclosure requirements and identify rules that should apply only to the largest companies.”
It’s important to keep in mind that Commissioner Uyeda is serving as Acting Chair, so the final say on the SEC’s priorities for the upcoming year will rest with Paul Atkins after he’s confirmed. Still, as we’ve previously said, both Commissioner Uyeda and Commissioner Peirce worked closely with Atkins during his prior tenure at the SEC, so I’d wager this is a pretty good preview of the SEC’s regulatory priorities when it comes to promoting capital formation.
On Friday, a Maryland federal court entered a preliminary injunction enjoining enforcement of certain provisions of the two anti-DEI executive orders that President Trump issued in January. This excerpt from Gibson Dunn’s memo on the decision summarizes the scope of the Court’s ruling:
The court enjoined the government defendants from freezing or terminating existing “equity related” contracts and grants (pursuant to EO 14151). With respect to EO 14173, the court enjoined the government defendants from (1) requiring federal contractors and grant recipients to certify that they do not “operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws,” (2) requiring federal contractors and grant recipients “to agree that [their] compliance in all respects with all applicable Federal anti-discrimination laws is material” for purposes of the False Claims Act, and (3) bringing any enforcement action targeting “DEI programs or principles.” However, the court declined to “enjoin the Attorney General from. . . engaging in investigation” of DEI programs.
The memo also points out that although the injunction is nationwide in scope, it is directed to the “Defendants” in the case, which means that the government is likely to take the position that non-defendant agencies, which include, among others, the Defense Department, the State Department and the Treasury Department, aren’t subject to the injunction unless they are acting in concert with the defendants.
Meredith recently hosted a Pay & Proxy Podcast on “DEI Disclosures and Metrics Following the January 2025 Executive Orders.” She was joined by Maj Vaseghi and Betty Huber, both of whom are Latham partners, and Mark Borges, who is a principal at Compensia and an editor at CompensationStandards.com. This 27-minute podcast addressed a wide range of disclosure and compensation-related issues associated with DEI programs and metrics, including:
– Students for Fair Admissions v. Harvard and private sector cases involving Section 1981 and Title VII of the Civil Rights Act
– The recent Executive Orders including the directive to federal agencies to identify potential “compliance investigations” aimed at deterring DEI programs constituting “illegal” discrimination
– How companies are considering legal risk, political risk, talent risk and business risk in preparing disclosures
– Companies, especially government contractors, weighing changes to the use of DEI metrics in compensation programs
– Disclosures regarding DEI metrics in compensation programs
– Human capital management disclosures in Form 10-Ks
– Required and voluntary board diversity disclosures in proxy statements after vacatur of Nasdaq’s “disclose or comply” board diversity rule
– ISS’s announcement that it will indefinitely halt consideration of certain diversity factors in making vote recommendations on director elections
– Voluntary proxy disclosures on DEI policies and practices
– Looking at committee charters and corporate governance guidelines
– Weighing whether to maintain the timing or delay publishing voluntary ESG reports
– Setting metrics for 2025 compensation program
These podcasts are ordinarily available exclusively to members of CompensationStandards.com, but we know many of our members are struggling with issues arising out of the recent anti-DEI executive orders, so we decided to make this podcast available to members of TheCorporateCounsel.net as well. If you’re looking for more high-quality, practical insights into executive compensation issues, you need a subscription to CompensationStandards.com. If you’re not yet a subscriber, you can sign up for a membership today online or by emailing sales@ccrcorp.com or by calling us at 800-737-1271.
Last week, Acting Solicitor General Sarah Harris sent a letter to Senator Charles Grassley informing the Senate that the DOJ had determined that statutory removal restrictions on administrative law judges were unconstitutional and that it would no longer defend them in court:
In Free Enterprise Fund v. PCAOB, 561 U.S.477(2010), the Supreme Court determined that granting “multilayer protection from removal” to executive officers “is contrary to Article II’s vesting of the executive power in the President.” Id. at 484. The President may not “be restricted in his ability to remove a principal [executive]officer, who is in turn restricted in his ability to remove an inferior [executive] officer.” Ibid.
A federal statute provides that a federal agency may remove an ALJ “only for good cause established and determined by the Merit Systems Protection Board on the record after opportunity for hearing before the Board.” 5 U.S.C. 7521(a). Another statute provides that a member of the Board” may be removed by the President only for inefficiency, neglect of duty, or malfeasance in office.” 5 U.S.C. 1202(d). Consistent with the Supreme Court’s decision in Free Enterprise Fund, the Department has determined that those statutory provisions violate Article II by restricting the President’s ability to remove principal executive officers, who are in turn restricted in their ability to remove inferior executive officers.
What does this mean for the SEC’s ALJs? Well, here’s what Project 2025 has to say about what should be done with the SEC’s administrative proceedings:
Eliminate all administrative proceedings (APs) within the SEC except for stop orders related to defective registration statements. The SEC enforcement system does not need to have both district court cases and APs. Alternatively, respondents should be allowed to elect whether an adjudication occurs in the SEC’s administrative law court or an ordinary Article III federal court.
I guess that last sentence leaves a little wiggle room, but if I were an SEC ALJ, I think I’d be updating my resume. Other commenters are more emphatic in their assessment of the impact of the DOJ’s move. For example, former SEC staff member John Reed Stark headlines his LinkedIn post on the DOJ’s action as follows: “Expect All SEC Administrative Law Judges to be Fired Forthwith.”
Warren Buffett issued his always highly anticipated annual letter to Berkshire Hathaway stockholders over the weekend. While the media has focused primarily on his advice to Donald Trump, his aversion to foreign stocks & his defense of Berkshire’s cash hoard, it’s his continuing distaste for what compliance with GAAP does to Berkshire’s operating income that caught my eye.
As we’ve pointed out in blogs about his 2023 and 2020 letters, railing against GAAP’s impact on Berkshire’s operating income has become a bit of a hobby horse for Warren Buffett. His problem is ASC 321, which requires Berkshire Hathaway to run fluctuations in the value of its public company equity investments through its income statement. Buffett thinks that results in a misleading presentation, and this excerpt from this year’s letter explains why:
Our measure excludes capital gains or losses on the stocks and bonds we own, whether realized or unrealized. Over time, we think it highly likely that gains will prevail – why else would we buy these securities? – though the year-by-year numbers will swing wildly and unpredictably. Our horizon for such commitments is almost always far longer than a single year. In many, our thinking involves decades. These long-termers are the purchases that sometimes make the cash register ring like church bells.
Fair enough, but here’s the thing – Berkshire made a business decision to take multi-billion-dollar minority stakes in enormous companies. What if it had to sell one or more of those positions? That’s what ASC 321 is getting at – it shows users of the financial statements the market risk to which Berkshire is exposed. Interestingly, despite his preference for reporting Berkshire’s non-GAAP operating earnings, he acknowledges the magnitude of this risk a few pages later:
With marketable equities, it is easier to change course when I make a mistake. Berkshire’s present size, it should be underscored, diminishes this valuable option. We can’t come and go on a dime. Sometimes a year or more is required to establish or divest an investment. Additionally, with ownership of minority positions we can’t change management if that action is needed or control what is done with capital flows if we are unhappy with the decisions being made.
As I said in my blog about Buffett’s 2020 letter, GAAP does have a conservative bias, but the disclosures it requires usually provide insights into a business that shouldn’t be ignored, and when people complain that GAAP’s distorting their company’s financial statements, it’s usually a sign that the GAAP requirements are highlighting something that makes them uncomfortable. To Warren Buffett’s credit, he acknowledges what that something is in this year’s letter.
Goodwin recently published its 2025 Proxy Statement Form Check. In addition to providing a chart laying out relevant Schedule 14A & Reg S-K line-item disclosure requirements, the document includes a detailed discussion of new and revised disclosure requirements that will apply to this year’s filings. The document also addresses certain “less than annual” disclosure requirements like say-on-pay frequency and CEO pay ratio.
Allianz’s 2025 Risk Barometer identifies the following as the top five risks facing global business in 2025: cyber incidents, business interruption, natural catastrophes, changes in legislation and regulation, and climate change. Here’s what Allianz has to say about business interruption:
Business interruption ranks #2 in the Allianz Risk Barometer, meaning it has appeared in the top two risks for the past 10 years. It is the top risk in the Asia Pacificregion (new) and in 12 countries / territories – Austria (new), Canada, China (new), Hong Kong (new), Indonesia (new), Malaysia, Mexico (new), Netherlands, Philippines (new), Singapore, South Korea and Sweden (new).
It is also the top risk in (11) industries: Consumer goods (new), entertainment, food and beverages, heavy industry, hospitality (new), manufacturing (both automotive and other), oil and gas, power and utilities, renewable energy, and transportation and logistics (new).
The impact of a cyber incident or a natural catastrophe are the business interruption exposures companies fear most. The most important actions that companies are taking to de-risk their supply chains and make them more resilient, according to respondents are: Developing alternative/multiple suppliers; Broadening geographical diversification of supplier networks in response to geopolitical trends; and Initiating/improving business continuity management.
Allianz says that the top risks for large companies mirror its top global risks, with cyber incidents, business interruption and natural catastrophes leading the way. For smaller companies, the risks of changes in legislation and regulation have become more significant, and risks like climate change and political violence that were in the past concerns for larger businesses have become more prominent for smaller companies.
Amid the rumblings and grumblings about companies leaving Delaware as a result of a handful of controversial 2024 Chancery Court decisions, two states have emerged as potential contenders for Delaware emigres. The first, Nevada, has long been touted as an alternative to Delaware. More recently, Elon Musk’s decision to move Tesla to Texas, together with the state’s decision to establish a dedicated Business Court, have had more companies eyeing The Lone Star State as a possible new home.
Companies thinking about reincorporating in Texas should read this recent CLS Blue Sky Blog post, which suggests that Texas has a long way to go to before its Business Court provides companies with anything comparable to the Delaware Court of Chancery:
Delaware’s Court of Chancery is celebrated for rapid and efficient decisions. Complex disputes, including merger-related injunctions, are often resolved within weeks. The absence of juries is a big reason for this speed, which helps, maintain stability for litigants and financial markets. The availability of jury trials in the Business Court, however, introduces unique considerations for complex corporate litigation and could lead to substantial delays and unpredictability. Jury selection, deliberation, and the potential for appeals based on jury decisions prolong case resolution and can create outcome inconsistencies.
The 1985 Pennzoil v. Texaco case in Texas serves as a cautionary tale. It resulted in an unprecedented $10.53 billion verdict against Texaco and highlighted the potential for unpredictable outcomes in high-stakes corporate litigation. To address these challenges while maintaining the constitutional right to a jury trial, Texas should consider a specialized jury selection process, which would provide enhanced jury education, encourage bench trials for complex cases, implement bifurcated trials, and use special masters or neutral experts.
Delaware’s streamlined processes enhance its reputation for efficiency. Procedural rules in the Court of Chancery are designed to expedite high-stakes corporate litigation, with mechanisms like summary judgments and injunction hearings conducted on tight schedules. The Business Court, by contrast, must develop similar procedural innovations to ensure it can meet the time-sensitive demands of corporate litigants.
The blog also notes that the right to a jury trial and the two-year terms of Business Court judges may impede Texas’s ability to develop the kind of deep body of opinion precedent necessary to compete with Delaware’s.
I ran into our friend & former colleague Broc Romanek at SRI this week and we had a chance to grab lunch together. It was great to see him, and it reminded me to check out his latest post on Cooley’s “Governance Beat” blog. As usual, it’s worth sharing. In his post, Broc discussed the rapid growth in the length of corporate sustainability reports, which have apparently grown by nearly 20% on average since 2021. He cites a few factors driving their increasing length:
– Alignment with more reporting frameworks, creating many pages of SASB and GRI tables.
– More sophisticated and granular quantitative – particularly, climate – reporting, with a more detailed discussion of methodology.
– Attempts to focus reporting more on company-specific initiatives and issues, rather than broad generic topics, resulting in multipage discussions – with plenty of marketing gloss – about company programs, including case studies.
Broc doesn’t necessarily endorse this trend, noting that there’s frequently unnecessary fluff in longer reports and their length makes quality control more difficult. Also, the longer the report, the more plaintiffs have to shoot at. Broc sums up his general approach to sustainability reports & life in general in the blog’s first paragraph:
As I get older, my motto has been “less is more.” That certainly works for a mindful lifestyle. And it also works for pickleball, as one learns to hit the ball softly and place it cleanly rather than banging away at it to earn points.
Broc plays a lot of pickleball, so I know his advice about the game is sound. I’ve played only a little pickleball, but I have also some advice for you if you’re thinking of giving the game a try. My advice is this – pickleball was invented by malevolent orthopedic surgeons, and this deceptively gentle-looking game carries a not insignificant risk of injury for Boomers & Gen Xers who take it up. As I will now explain, I know this from experience.
Last year, my wife signed us up for pickleball lessons at a local tennis club. All went well until the final class, when I was playing doubles, and my partner missed the ball. Since I firmly believe that I’m 62 going on 22, I determined that I would race across the court and attempt a daring save of the point. I failed miserably, lost my balance, and grabbed the tennis net behind me in an effort to break my fall. My hand got tangled in the net and, to make a long story short, I was soon on my way to the emergency room with the two middle fingers on my right hand pointed at a 45-degree angle.
This was unpleasant, although the folks at the emergency room seemed to enjoy the story of how I ended up there. Between giggles, the nurses told me they see a lot of pickleball injuries from geriatrics like me who refuse to go gentle into the good night. They also said that there is a widely held hypothesis among ER professionals that the game was invented by orthopedic surgeons to drum up business.
Fortunately, my fingers weren’t broken, just badly dislocated. The doctor popped my fingers back in and The Cleveland Clinic sent me a bill for $3,000. Because I didn’t cry about either of these events, my wife bought me McDonald’s for being such a brave little guy.
The bottom line is that I’ve played hockey ineptly for over 20 years without a scratch, but it only took me three weeks of pickleball to end up in the emergency room. So, based on my own experiences as I get older, my spin on Broc’s motto is that for me, when it comes to pickleball, “less is more.”
