Many institutional investors have incessantly whined about vociferously objected to dual-class capital structures, which could be eliminated pretty quickly if they simply refused to invest in IPOs by companies that adopted them. Apparently, that’s not a viable alternative because of “FOMO” or something, but this excerpt from a recent Fenwick memo indicates that institutional investors’ “buy first, whine later” strategy doesn’t seem to be working very well, at least in Silicon Valley:
Adoption of dual-class voting stock structures has continued its more than decade long upward trend among Silicon Valley technology companies, reaching 29.3% of companies in the SV 150 in the 2023 proxy season. Historically, dual-class voting stock structures were significantly more common among S&P 100 companies than among the technology and life sciences companies in the SV 150, though the frequency in the SV 150 has surpassed that in the S&P 100 since 2015.
Other than the recent overall trend in the SV 150, the variation in the percentage of each group over time is primarily a function of changes in the constituents of each group. Within the SV 150, our data suggests that since 2018 there has been a steady increase in dual-class voting structures. That has been a function of companies such as Alphabet (Google), Meta (Facebook), Block (formerly Square), Airbnb, DoorDash, Lyft, Twilio, Zoom Video Communications, and Coinbase joining the SV 150 with dual-class structures.
The memo points out that from 2018 through 2022, 42% of tech companies that went public had a dual- class voting stock structure in place, and that investors expect the trend of companies going public with dual-class structures is likely to continue. That means the percentage of SV 150 companies with dual- class structures is likely to grow as well.
Check out our latest “Timely Takes” Podcast featuring Orrick’s J.T. Ho & his monthly update on securities & governance developments. In this installment, J.T. reviews:
– SEC’s Fall Reg Flex Agenda
– FBI & DOJ Guidance on Seeking Cyber Incident Reporting Delays
– SEC & Corp Fin Guidance on Cyber Incident Reporting Rules
– Israel-Hamas Disclosure Considerations
– ISS’s Updated Proxy Voting Guidelines and FAQs
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 us at john@thecorporatecounsel.net or mervine@ccrcorp.com.
Today, the SCOTUS will hear oral arguments in two cases,Loper Bright Enterprises v. Raimondo and Relentless Inc. v. Dept. of Commerce, that present the question of whether the Court should overturn the 40-year-old “Chevron Doctrine,” which provides that when Congress implicitly delegates authority under a statute to an administrative agency, federal courts are required to defer to the agency’s reasonable interpretations of that statute.
Chevron deference has long been a prime target of conservative opponents of the “administrative state,” and they scored a big victory with the SCOTUS’s 2022 decision in West Virginia v. EPA, which narrowed the scope of Chevron by limiting administrative agencies’ ability to assert their authority over “major questions” absent a clear delegation of that authority from Congress. However, in this excerpt from the Solicitor General’s brief, the Biden Administration warns that overturning Chevron is a much bigger step, with potentially enormous consequences:
[O]verruling Chevron would be a convulsive shock to the legal system. All three Branches of government, regulated parties, and the public have arranged their affairs for decades with Chevron as the backdrop against which Congress legislates, agencies issue rules and orders, and courts resolve disputes about those agency actions. Given its central importance, overruling Chevron would threaten substantial disruption in federal programs such as Social Security and would upset settled expectations in virtually every area of federal law. And if Chevron were overruled, the federal courts would inevitably be required to resolve policy questions properly left to the “political branch[es].”
As a practical matter, Columbia Prof. Thomas Merrill observes that overturning Chevron would be a recipe for judicial gridlock when it comes to resolving challenges to agency actions: “If every court of appeals were required to apply de novo review to every question of law that arises in a regulatory context, the courts of appeals would be overwhelmed.” On the other hand, advocates of overturning the doctrine argue that it violates the Administrative Procedure Act, has no constitutional basis and has licensed Congress to pass vague laws delegating authority to administrative agencies (hmm. . . what laws could they possibly be thinking of?).
Whatever side you think has the better of the argument, it seems fair to say that the SCOTUS’s decision in these cases has the potential to make sweeping changes in the way federal regulatory agencies operate and the role that the federal courts play in overseeing their actions. If you’re interested in listening to oral arguments in the cases, you can tune in here for a live feed.
I think most people who follow corporate governance issue are well aware that support for ESG-related shareholder proposals by major asset managers has declined in recent years, but I’m not sure that people fully appreciate that when it comes to the Big 4, their level of support hasn’t just declined – it’s fallen off a cliff. Here’s an excerpt from a recent report by ShareAction:
The four largest asset managers in the world dominate the sector, holding 39% of the total assets under management (AuM) of all 69 managers we analysed. The ‘big four’ have shown a significant and consistent decline in their support for shareholder resolutions seeking corporate improvements on important environmental and social issues, supporting – on average – one eighth of resolutions in 2023.
BlackRock, the largest asset manager in the world, only supported 8% of environmental and social shareholder resolutions in 2023, whereas in 2021 it had supported 40% of such resolutions. Vanguard, the world’s second largest asset manager, showed the weakest performance of the ‘big four’, supporting only 3% of resolutions in 2023.
All four asset managers voted significantly more conservatively than advised by the leading proxy voting advisors, ISS and Glass Lewis.
The departures from ISS & Glass Lewis’s recommendations are particularly striking. According to ShareAction, ISS recommended yes on nearly 80% of ESG proposals last year, and Glass Lewis recommended yes on about 35%. In contrast, State Street, which was the most supportive of the Big 4 when it came to 2023 ESG proposals, only voted in favor of about 25% of them.
Liz has previously blogged about BlackRock’s explanation for its overall lower levels of support for shareholder proposals in 2023, and Larry Fink mumbled something that might be relevant to this topic last summer, but whatever the reason, it looks like ESG proponents will continue to have a tough time getting traction on their proposals during the upcoming proxy season.
Join us tomorrow at 2 pm eastern for our “ISS Forecast for 2024 Proxy Season” webcast to hear ISS’s Marc Goldstein, Davis Polk’s Ning Chiu & Sustainable Governance Partners’ Rob Main discuss what transpired during the 2023 proxy season and what steps companies can take to prepare for 2024.
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The beneficial ownership reporting requirements of the Corporate Transparency Act went into effect on January 1, 2024. As we’ve previously blogged, regulations under the Act require every foreign or domestic legal entity that qualifies as a “reporting company” to file reports with FinCEN that identify the entity’s beneficial owners. Entities formed after January 1, 2024, will also have to identify the individuals who have filed to form or register the entity in question.
Those individuals involved in the filing process are referred to under the regulations as “company applicants” and they include up to two people: the person who directly files the document that creates or registers the company and, if more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing. FinCEN recently issued a set of FAQs providing guidance on who qualifies as a company applicant. The 1st FAQ on this topic says the following:
For the purposes of determining who is a company applicant, it is not relevant who signs the creation or registration document, for example, as an incorporator. To determine who is primarily responsible for directing or controlling the filing of the document, consider who is responsible for making the decisions about the filing of the document, such as how the filing is managed, what content the document includes, and when and where the filing occurs.
I’m guessing that many folks didn’t expect the interpretation to cast this wide a net – and yes, FinCEN makes it clear that it’s looking to rope the lawyers involved in the process as company applicants, as this example from the FAQ illustrates:
Scenario 1: Consider an attorney who completes a company creation document using information provided by a client, and then sends the document to a corporate service provider for filing with a secretary of state. In this example:
The attorney is the company applicant who is primarily responsible for directing or controlling the filing because they prepared the creation document and directed the corporate service provider to file it.
The individual at the corporate service provider is the company applicant who directly filed the document with the secretary of state.
Okay, I’m guessing this result comes as an unpleasant surprise to a lot of lawyers who probably didn’t expect to find themselves in this position. But you ain’t seen nothin’ yet! The 2nd FAQ addresses what happens if you use a third-party delivery service to file your company creation docs with a secretary of state – and makes it clear that the paralegal you’ve handed the filing process off to is now also a company applicant:
For example, an attorney at a law firm may be involved in the preparation of incorporation documents. The attorney directs a paralegal to file the documents. The paralegal may then request a third-party delivery service to deliver the incorporation documents to the secretary of state’s office. The paralegal is the company applicant who directly files the documents, even though the third-party delivery service delivered the documents on the paralegal’s behalf. The attorney at the law firm who was involved in the preparation of the incorporation documents and who directed the paralegal to file the documents will also be a company applicant because the attorney was primarily responsible for directing or controlling the filing of the documents.
Now, roping in the paralegal seems excessive to me, but the next nugget of interpretive guidance marks the spot where FinCEN interpretive position morphs into a full-blown bureaucratic fever dream. Here’s what happens if you use one of your law firm’s messengers to file a company creation document with a secretary of state:
For example, a mailroom employee at a law firm may physically deliver the document that creates a reporting company at the direction of an attorney at the law firm who is primarily responsible for decisions related to the filing. Both individuals are company applicants.
Yup, you read that right. That kid who wanders around the office with the mail cart or picks up the lunch order for your corporate department meeting has to be identified in a FinCEN filing. This may seem, well, kind of insane, but I’m sure FinCEN firmly believes that if that kid isn’t named as a company applicant, the terrorists win.
Last week’s compromise of SEC’s X social media account continues to attract attention from the agency, federal law enforcement and – oh goodie! – Congress. On Friday, SEC Chair Gary Gensler issued a statement on the matter, and this excerpt summarizes the SEC’s current understanding of what happened:
Based on current information, staff understands that, shortly after 4:00 pm ET on Tuesday, January 9, 2024, an unauthorized party gained access to the @SECGov X.com account by obtaining control over the phone number associated with the account. The unauthorized party made one post at 4:11 pm ET purporting to announce the Commission’s approval of spot bitcoin exchange-traded funds, as well as a second post approximately two minutes later that said “$BTC.” The unauthorized party subsequently deleted the second post, but not the first. Using the @SECGov account, the unauthorized party also liked two posts by non-SEC accounts. While SEC staff is still assessing the scope of the incident, there is currently no evidence that the unauthorized party gained access to SEC systems, data, devices, or other social media accounts.
The statement notes that the SEC continues to assess the impacts of the hack but acknowledges that “those impacts include concerns about the security of the SEC’s social media accounts.” It goes on to state that the SEC is coordinating with an alphabet soup of federal law enforcement and oversight agencies, including its own Office of the Inspector General, the FBI, DHS and CISA.
In what may be the least surprising news of the week, politicians were quick to arrive at the scene. First out of the gate were senators J.D. Vance (R-OH) and Thom Tillis (R-NC), who lobbed in this letter to Chair Gensler on the day the incident became public characterizing it as a “colossal error” and requesting a briefing. On Thursday, senators Ron Wyden (D-OR) and Cynthia Lummis (R-WY) followed up with a letter to the SEC’s OIG criticizing the agency’s failure to adhere to cybersecurity best practices and calling for the OIG to provide the senators with an update on its investigation and the SEC’s remediation efforts by February 24th.
Speaking of cybersecurity incidents, this Covington memo provides some guidance on how companies can minimize their own risk of running into trouble with the SEC on cybersecurity issues. One recommendation is that companies review and update their list of “crown jewel” information and technology assets:
The SEC’s SolarWinds complaint, along with commentary in the Rules’ adopting release, make clear that companies are expected not only to identify their “crown jewels,” but to take appropriate action to protect them. Specifically, the SEC’s complaint faulted both SolarWinds and its CISO for not disclosing to the investing public known risks facing products and services that it had identified as among its “crown jewels.” Similarly, the Rules’ commentary suggests that if a cybersecurity incident impacts a company’s “crown jewels,” that information might be sufficient to make a materiality determination even before the company has “complete information” about the incident.
Consider identifying your organization’s “crown jewels” (or re-evaluating an existing list) to ensure the list is updated and not overly broad. Also consider prioritizing efforts to identify cybersecurity risks regarding crown jewels and the controls that protect them.
The SEC’s SolarWinds complaint also treated a company’s “crown jewels” as key assets and the company’s safeguards to protect against unauthorized access to those assets as part of the company’s internal accounting controls (which were alleged to be inadequate).
Other recommendations include updating cybersecurity risk governance disclosures in annual reports to ensure their accuracy, resolving documented cybersecurity “red flags” and providing training on best practices for internal documentation, assessing how existing incident response plans and disclosure control procedures should be integrated, and engaging in pre-incident testing of response procedures.
Earlier this month, former securities analyst Ray Dirks passed away at the age of 89. Dirks was the petitioner in the famous case of Dirks v. SEC, in which the SCOTUS overturned a censure issued against him by the SEC for violating Rule 10b-5’s prohibition on insider trading. The SEC contended that Dirks, who uncovered & alerted the SEC and The Wall Street Journal to potential corporate wrongdoing, violated the prohibition on insider trading by “tipping” his firm’s clients to what he uncovered.
The SCOTUS rejected that argument, but in overturning Dirks’ censure, it established a standard for tipper/tippee liability that turned on whether or not the tipper violated a fiduciary duty by sharing the information in question. In a recent blog on the occasion of Dirks’ passing, Gunster’s Bob Lamm points out that this standard has created a lot of confusion and uncertainty about the boundaries of insider trading liability:
I don’t blame the Court for coming up with this rather convoluted route to Dirks’s exoneration; after all, one of my law school professors used to beat us over the head with the notion that courts will sometimes bend over backwards to fashion a remedy where the strict letter of the law leads to an unjust result. That seems to me to be a good thing. Also, I know that I’m in the minority – possibly a very small minority – that believes that the goal of insider trading law should be to create a level playing field rather than to punish breaches of fiduciary duty.
Still, the Dirks case has resulted in decades of confusion over what is – and what is not – insider trading, and I believe that we’d have all been better off if the SEC had not engaged in overzealousness where Dirks was concerned – particularly given the agency’s non-response to the allegations he’d brought to its attention.
The latest issue of The Corporate Counsel has been sent to the printer. It is also available now online to members of The CorporateCounsel.net who subscribe to the electronic format. The issue includes the following articles:
– SEC Amends Section 13(d) and Section 13(g) Beneficial Ownership Reporting Rules
– Related Person Transactions: Item 404’s Requirements
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