Last week, the DC Circuit affirmed a federal district court’s 2024 decision vacating the SEC’s 2020 rule that would have subjected proxy advisors to enhanced regulation by saying they engaged in the “solicitation” of proxies. In reaching its decision, the Court noted that the Exchange Act doesn’t define the term “solicitation,” and so it looked to evidence of its ordinary definition at the time the statute was enacted:
Contemporaneous dictionaries suggest that “to solicit” and “solicitation” entail seeking to persuade another to take a specific action. . . In short, extending the term “solicit” to encompass voting recommendations requested by another would go beyond the 1934 meaning.
And the same is true today. Between a proxy adviser and its client, it might be reasonable to say that the client “solicits” the adviser’s recommendation but that interpretation does not suggest that, in providing that recommendation, the adviser has “solicited” the client’s vote. The adviser, although it holds itself out to attract clients, does not initiate the exchange; it provides advice only in response to the client’s request. In other words, the solicitation runs in the opposite direction to the one suggested by NAM.
By contrast, a company director who hopes to obtain a particular outcome from a particular vote might “solicit” the proxy votes of shareholders in order to achieve his goal. Based on that understanding, we conclude that the ordinary meaning of “solicit” does not include entities that provide proxy voting recommendations requested by others, even if those recommendations influence the requestors’ eventual votes.
Barring an appeal to the SCOTUS, it appears that the proxy advisors have won this round – but they aren’t out of the woods yet. In addition to state initiatives like the legislation recently enacted in Texas, a new piece of proposed federal legislation was introduced in late June that would prohibit proxy advisors from issuing voting advice in any situation where they have a conflict of interest – which the proposed legislation defines as broadly as you think it would.
The latest issue of The Corporate Executive newsletter has been sent to the printer. It is also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format. This issue includes Dave’s observations on areas that the Commission should consider if it decides to proceed with overhauling its executive compensation disclosure rules – as well as these other practical topics:
– Clawbacks: The Process After a Decision to Restate
– New Staff Guidance on Clawback Disclosures
– Unlock Luck with a Winning Strategy — Join Us in Vegas!
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Winston & Strawn looked at 2025 Fortune 100 proxy filings, and their recent blog says that the Trump administration’s executive orders targeting DEI programs have influenced the way that public companies talk about DEI in their proxy statements:
An overwhelming majority (68 out of 74 companies reviewed) of public Fortune 100 companies parsed back references to DEI initiatives in their proxy statements in at least some way. A number of public companies took a literal approach and reduced the frequency with which the words “diversity” or “diverse” appear in their proxy statements. Others chose to qualify any mention of “diversity” with phrases such as “of experiences and backgrounds” instead of explicitly mentioning gender or race. Some companies took deliberate steps to minimize the visibility of their diversity matrices, such as rendering them in gray scale, shrinking their size, or including them in less-prominent sections of the proxy statement.
A handful of companies eliminated any mention of diversity entirely, but the more common approach was to repackage the same information in a more scaled-back form, presumably to mitigate legal and regulatory risk. Out of 74 companies reviewed, 38 companies highlighted women directors/general board gender diversity, 33 companies highlighted racially diverse directors, and only two companies highlighted LGBTQ+ directors.
The blog also says that after the 5th Cir.’s decision to invalidate Nasdaq’s Board Diversity Rule, many companies have opted to eliminate board diversity matrix disclosure. Winston & Strawn found that only three of the 14 Fortune 100 Nasdaq-listed companies it reviewed, only three continued to include the diversity matrix in their 2025 proxy statements.
Anyone who has dealt with the Staff during the comment process has from time-to-time made the strategic decision not to contest a comment that they don’t necessarily agree with, but the 9th Circuit’s recent decision in Pino v. Cardone Capital, (9th Cir.; 10/24), indicates that such a decision can sometimes be very consequential.
The case involved allegations that the defendants knew that projections about internal rates of return an investment fund would achieve and distributions that it would make to investors made during the marketing process for its Reg A offering were false and misleading. The plaintiff contended that the defendants failed to disclose an SEC comment letter request the fund to remove the projected rates of return and distributions from its offering materials constituted a material omission under Section 12(a)(2) of the Securities Act.
Under Omnicare, in order for a defendant to be liable for statements of opinion, that opinion must be objectively false, and the speaker must not actually hold the professed opinion. This latter requirement is known as “subjective falsity,” and the 9th Circuit believed that the defendant’s failure to contest the SEC’s comment provided significant evidence of it:
Under Omnicare, subjective falsity goes to whether “the speaker actually holds the stated belief.” Omnicare, 575 U.S. at 184. Pino’s allegation of Cardone’s subjective disbelief is both strong and reasonable: Cardone made a projection of 15% IRR and relatedly high distributions in its initial offering circular. The SEC reviewed the offer and in a letter to Cardone stated these projections lacked backing and should be removed. Cardone pushed back on other criticisms from the SEC, but not this one, suggesting Cardone did not truly believe its own projections and lacked evidence to rebut the SEC.
Barnes & Thornburg’s Jay Knight and Scott Budlong suggest in a recent blog that the 9th Circuit’s decision may prompt companies to consider including their own version of a “Tandy” representation in their response letters to Staff comments:
The Pino opinion suggests that, depending on the circumstances, a company may want to consider including a statement in its comment letter response that is effectively the obverse of a Tandy representation — that is, a statement to the effect that the company’s response to any particular comment should not be construed as indicating the company’s agreement with the comment. In other words, while Tandy said that the company would not use the SEC review process as a shield in a legal proceeding, Pino entailed the plaintiff using the SEC review process as a sword, and companies may wish to consider defending themselves preemptively from that risk.
A recent Bryan Cave blog provides a reminder to calendar-year end companies that it’s time to confirm their filer status:
In light of the recent market volatility, public companies should keep in mind the upcoming annual re-evaluation of their filer status, as a change may have ramifications for both the timing and content for the following year’s SEC reporting. June 30 is a key measurement date for calendar fiscal year reporting companies in determining whether their filing status changes for the following year in respect of the following:
– Large accelerated filer (LAF)
– Accelerated filer (AF);
– Non-accelerated filer (NAF);
– Smaller reporting company (SRC); and
– Emerging growth company (EGC).
The year-end determination governs (i) the deadline for the respective annual report and subsequent quarterly reports for LAFs, AFs and NAFs, and (ii) the availability of certain scaled reporting obligations for SRCs and EGCs.
In case you need a refresher, the blog goes on to discuss the qualifications for each level of filer status and the different reporting obligations to which each filer class is subject.
Ideagen/Audit Analytics recently released its annual study of financial restatements. The study provides data on restatements from 2005 through 2024, and the topics addressed include the number of Big R & Little r restatements, the average length of the restatement period, the impact of restatements on previously reported income, and a breakdown of restatements by industry. This excerpt discusses the filer status of companies that restated results:
Non-accelerated filers continue to disclose the most restatements of any filer status. In 2021, the number of non accelerated filer restatements increased by 451% to a total of 1,136 restatements, primarily due to SPAC restatements. This was the largest amount seen for any filer status group over the 20-year period. Although restatements have generally returned to pre-2021 levels, non-accelerated filer restatements still constituted the largest percentage of all restatements during 2024 at 45%.
Despite still having of the largest percentage, non-accelerated filers achieved the lowest percentage of total restatements since 2019 and the second lowest figure over the 20-year period. In 2024, 100 restatements came from these smaller companies, down from 243 restatements for non-accelerated filers in 2023.
Accelerated filers have seen the lowest restatement rates for the past 12 years, constituting between 5% and 31% of restatements annually. After reaching a historic low of 5% in 2021, the percentage of restatements filed by accelerated filers increased to 20% in 2024, aligned with the overall average for accelerated filers across the period. The total number of accelerated filer restatements reached an all-time low of 44 in 2024, decreasing from 63 restatements in 2023.
The percentage and total number of restatements filed by large accelerated filers have continued to exceed those of accelerated filers since 2012. In 2019, 35% of restatements were filed by large accelerated filers, the most seen over the 20-year period. In 2024, the percentage of large accelerated filer restatements increased significantly from 20% in 2023 to 35%, despite only a slight increase in the total number of restatements from 75 to 78.
The study found that total restatements increased by approximately 10%, from 434 in 2023 to 479 in 2024, and that the majority of the increase is attributable to restatements by former BF Borgers clients, who were associated with 41 restatements disclosed last year.
Over the past few years, we’ve blogged about the DOJ’s enforcement push targeting violations of the Clayton Act’s prohibition on interlocking directorates. That push has resulted in a few handfuls of director resignations, but a new study from a group of Stanford & Boston University law professors suggests that antitrust regulators have a lot of work left to do when it comes to director interlocks. In fact, their study claims that the level of non-compliance with Section 8 of the Clayton Act is simply shocking:
We show that large numbers of companies are directly violating that law, and that the problem goes well beyond simply breaking the law. Using a new dataset that enables us to provide the first analysis of board members on both public and private companies—rather than just public companies—we find 2,309 instances of individuals sitting on the boards of two companies that are direct competitors. The extent of interlocks is so great that for those companies about which we have data on at least five board members, 8.1% had an individual interlock.
The study says that interlocks are particularly common in the IT and life sciences industries, and claims that over 18% of pharma & biotech companies have at least one director who sits on the board of a direct competitor, while over 10% of IT software companies find themselves in the same position.
I’d be very surprised if the results of this study escaped the FTC & DOJ’s attention, so public and private companies would be smart to raise the consciousness of their boards about this issue and address any problems that are identified. Regulators haven’t typically sought to impose fines or penalties for interlocks violations, but they do force directors off of the board, which is disruptive and can cause reputational damage.
If you’re looking for some thoughts on how to prevent Clayton Act violations, check out this Forbes article by Woodruff Sawyer’s Priya Cherian Huskins.
Efforts by the Trump administration, anti-DEI activists, and private plaintiffs to target companies that continue to maintain DEI programs are receiving a lot of attention, but if companies think that the only risk they face is failing to unwind these programs as quickly as possible, a recent Bloomberg Law article says they need to think again. According to SMU Law Prof. Carliss Chatman, companies that roll back these programs may put themselves in legal jeopardy for that decision as well.
As she explains in the article, the issue arises under a Reconstruction Era civil rights statute, 42 USC §1981, which prohibits racial discrimination in making and enforcing contracts:
Section 1981 was enacted after the Civil War to guarantee all persons in the US the same right to make and enforce contracts “as is enjoyed by white citizens.” While the statute is often overlooked in corporate compliance discussions, it remains a potent tool for challenging race-based interference with commercial relationships.
Recent DEI pullbacks—especially those terminating or reducing contracts with Black vendors—may expose companies to Section 1981 litigation. Even in the wake of the Supreme Court decision Comcast Corp. v. NAAAOM, which imposed a but-for causation standard, companies are vulnerable if plaintiffs can show that race was a motivating factor in the decision to alter or end a contractual relationship.
This risk isn’t hypothetical. As companies such as Target and McDonald’s face public scrutiny for reversing course on supplier diversity, Black-owned businesses are left with fewer procurement opportunities and diminished access to markets that briefly opened during the post-George Floyd DEI wave.
If those opportunities didn’t evaporate because of objective performance metrics, but due to external political pressure or discomfort with racial equity branding, that may be enough to support a Section 1981 claim.
The article also points out that, if companies have previously highlighted their DEI policies as being a material component of their business strategy, sudden changes to those policies may trigger disclosure obligations under Regulation S-K and expose those companies to disclosure-based shareholder claims.
It’s been a tough year for business leaders, with each week seemingly bringing another unpleasant surprise for them to deal with. Since that’s the case, maybe it’s not surprising some of the responses to a recent survey of over 500 C-Suite executives by PwC and The Conference Board suggest that directors are increasingly getting on the nerves of corporate executives. For example:
– A whopping 93% of executives say they want someone on their board replaced (highest ever), but only 50% have confidence in their board’s ability to remove underperforming directors.
– Only 32% of executives think their board has the right expertise, with international, AI, and environmental/sustainability expertise topping the list of executives’ “want to haves” for their boards.
– 32% of executives think that their boards overstep the boundaries of their role. That’s double the percentage who thought so last year.
On the other hand, the survey also found that the percentage of C-Suite executives who rate their boards’ performance as excellent or good has increased from 29% in 2021 to 35% last year. However, that rating varies widely depending upon a particular executive’s role.
In that regard, 94% of CEOs and 72% of CFOs rate their boards’ performance as excellent or good, but that positive assessment plummets when you move down the ranks. Only 23% of CAOs, 32% of CHROs, 21% of CIOs and 23% of GCs give their boards an excellent or good rating. This excerpt from the survey suggests some reasons that might account for the differences in assessments of the board’s performance between various members of the C-Suite:
Not all executives have full visibility into board dynamics or deliberations, with perceptions shaped by select touchpoints or outcomes rather than the full scope of board responsibilities. Executives who interact with the board frequently tend to have a stronger grasp of its role and responsibilities. Those with more limited access to board discussions may have different expectations, often believing directors should have greater expertise in their functional areas. This could create a gap in perceived effectiveness among all executives.
This Troutman Pepper Locke alert says that the bill may actually be more complex and confusing than its title suggests, including with respect to when a digital asset is a security:
Despite promises of clarity in the Act’s short title, its definitions and numerous cross references to securities and commodities statutes and rules provide a complex and potentially confusing approach to clarifying status as a security and, accordingly, regulatory jurisdiction over digital assets.
Digital commodities and permitted payment stablecoins — which are currently the subject of proposed regulation under H.R. 2392, the Stablecoin Transparency and Accountability for a Better Ledger Economy Act of 2025 (the STABLE Act of 2025) — would expressly be excluded from the definition of “security” under the securities laws. In addition, the Act clarifies that a digital asset that is directly transferable peer-to-peer and recorded on the blockchain is not an “investment contract” and, therefore, not a security.
It also “distances the digital assets regulatory regime from existing securities and commodities laws” in a number of other ways and leaves gaps that it requires the CFTC to address through rulemaking that, in some cases, must be joint with the SEC.
After a Full Committee Markup hearing on June 10, the bill passed the House Committee on Financial Services and the House Agriculture Committee on Wednesday with bipartisan support. CoinDesk reports that the markups from each committee will be combined into a unified committee report to be considered by the full House.
