Speaking of IPOs, according to a recent WSJ article, the long IPO drought may be coming to an end. In fact, this excerpt says that investors are so eager for new issues that the only thing that might hold the market back may be the reluctance of private companies to take the plunge:
In the past several weeks, the major barriers to a resurgence in initial public offerings have lifted. U.S. stocks are climbing toward new 52-week highs, volatility is down, inflation has eased and, perhaps most important, investors are making speculative bets again.
What will determine whether the IPO market returns to a roar is now more about whether stewards of private companies want to make the transition to public ownership.
“It’s supply crimping the IPO market, not demand,” said Daniel Burton-Morgan, head of Americas Equity Capital Markets Syndicate at Bank of America. “Does that mean post Labor Day we see a more normal IPO market? Maybe. Or it could take another quarter. But at this juncture, investor demand is not the issue.”
The article notes that there are some potentially big deals in the queue for the fall, but nobody expects the market to quickly return to the scorching demand for new issues experienced during 2020-2021.
When Delaware amended Section 102(b)(7) of the DGCL last year to permit charter amendments exculpating officers from damages liability for breaches of the duty of care, people wondered whether many companies would propose amendments during the 2023 proxy season and, more importantly, how stockholders would react to those proposals. This excerpt from a Weil memo on this year’s officer exculpation proposals provides some answers to those questions:
Between August 1, 2022, when the amendment to DGCL Section 102(b)(7) became effective and July 5, 2023, 279 Delaware corporations included a proposal in their proxy statement requesting stockholder approval for a charter amendment to adopt an exculpatory provision for officers. Stockholders approved such proposal at 221 (79.2%) companies and did not approve the proposals at 42 of the 279 companies (15.1%). The results of the votes at 17 companies remain outstanding at the time of this publication.
Generally, pursuant to Section 242 of the DGCL, a charter amendment requires the vote of a majority of the outstanding stock entitled to vote on the matter. For companies that require supermajority approval under their governing documents, the higher vote threshold proved to be a hurdle to stockholder approval. Specifically, 18 of the 42 proposals that failed required a supermajority vote, 13 of which would have passed had the Delaware default standard applied.
People also wondered how the proxy advisors would react to these proposals. The memo says that ISS generally supported them, while Glass Lewis usually opposed them. It says that as of July 5, 2023, ISS supported 80% of these officer exculpation proposals. Another interesting tidbit is that 38 of the 47 proposals that ISS recommended against passed anyway. The memo didn’t provide any hard data on Glass Lewis’s recommendations, but since Glass Lewis’s superpower appears to be opacity, that’s not a huge surprise.
A recent Wilson Sonsini blog provides another interesting data point for how officer exculpation proposals fared with investors this proxy season. The blog looked specifically at Silicon Valley 150 companies, and while it found that relatively few companies asked stockholders to approve officer exculpation charter amendments, those that did enjoyed a fairly high rate of success:
Of the 143 SV150 companies that are incorporated in Delaware, only nine companies, or approximately 6.3 percent, included an officer exculpation proposal in their proxy statement.[3] Of those nine proposals, five required the affirmative vote of a majority of the voting power of the outstanding stock entitled to vote on the proposal (the default voting requirement under the DGCL for an amendment to the charter), and four required the affirmative vote of a supermajority (generally, 66 2/3 percent) of the voting power of the outstanding stock entitled to vote on the proposal.
Seven of the nine proposals, or approximately 78 percent, passed. The failed proposals were comprised of two of the four proposals that required a supermajority vote and, although they both received significantly more affirmative votes than “against” votes, they failed to attain the affirmative vote of a supermajority of the voting power of the outstanding stock entitled to vote thereon.
The blog says that while only a handful of SV 150 companies asked their stockholders to approve officer exculpation amendments this year, the success those companies enjoyed will likely prompt a much larger number to take this step next year. Based on the data in Weil’s memo, I think that it’s probably going to be the case beyond Silicon Valley as well.
Last week, Dave blogged about the PCAOB’s rather dismal assessment of audit deficiencies. With the PCAOB’s Chair very publicly ripping auditors a new orifice about shortcomings in their performance, investors also must be up in arms about audit quality issues, right? Yeah, well, apparently not so much. According to Audit Analytics, the capital markets’ trusty “arbiters of materiality” continue to vote overwhelmingly in favor of auditor ratification proposals – and by “overwhelmingly,” I mean in proportions that rival Joseph Stalin’s performance at the Soviet polls. Here’s what Audit Analytics found:
Throughout the last four years, our analysis on shareholder votes reveals that, on average, nearly 98% of total votes are cast in favor of auditor ratification. Shareholder votes filed between January 1, 2020 and December 31, 2022, continued that trend for a fifth consecutive year. Votes against auditor ratification comprised nearly 2% of the total votes; abstained votes account for the remaining 0.4% of total shareholder votes cast.
Audit Analytics says that fewer than 5% of shareholder votes were cast against the auditor, 93% of the time for proposals made during 2020-2022, although the frequency of votes in which more than 5% were cast against ratification increased. It also highlights the handful of situations in which a high percentage of shareholders voted against ratification.
In remarks delivered to the Financial Stability Oversight Council on Friday, SEC Chair Gary Gensler addressed the status of the agency’s proposed climate change disclosure rules. He didn’t tip his hand as to the timing of any action by the SEC, but he did defend the agency’s authority to adopt rules mandating disclosures concerning the impact of climate change. Here’s an excerpt:
In response to the Great Depression and fraudulent practices of the time, President Roosevelt and Congress came together to enact the federal securities laws in which they established a basic bargain in our markets. Investors get to decide which risks to take, so long as public companies raising money from the public make what Roosevelt called “complete and truthful disclosure.”
The SEC was assigned an important role regarding that basic bargain and public disclosure. Under the securities laws, though, the SEC is merit neutral. Investors get to decide what investments they make and risks they take based upon those disclosures. The SEC focuses on the disclosures about, not the merits of, the investment.
The SEC has no role as to climate risk itself. But we do have an important role in helping to ensure that public companies make full, fair, and truthful disclosure about the material risks they face.
Already today, issuers are making climate risk disclosures, and investors are making investment decisions based on those disclosures. Indeed, a majority of the top thousand issuers by market cap already make such disclosures, including what’s known as Scope 1 and Scope 2 greenhouse emissions. Further, investors representing tens of trillions of dollars in assets are making decisions relying on those disclosures.
I’m not very good at reading tea leaves, so I’ll leave it to you to decide whether to there’s any significance to Chair Gensler’s decision not to refer to Scope 3 disclosures – the most controversial part of the SEC’s rule proposal – in his remarks. The closest he came to discussing the timing of Commission action on the proposal in his comments was when he said that the SEC was “considering carefully” the 15,000+ comments received on the proposal and that it would consider adjustments that the Staff and the Commissioners consider appropriate.
We’ll have the latest on climate disclosure practices & the status of the SEC’s climate disclosure rule proposals at our “Proxy Disclosure & 20th Annual Executive Compensation” Conferences, which take place September 20th – 22nd, as well as our “2nd Annual Practical ESG Conference,” which takes place on September 19th. The “2nd Annual Practical ESG Conference” can be conveniently bundled with the “Proxy Disclosure & 20th Annual Executive Compensation” Conferences. Register today to ensure that you don’t miss out on our panelists critical insights!
Chair Gensler’s remarks before the FSOC weren’t the only place where the SEC’s rulemaking power was defended last week. In fact, I couldn’t resist channeling my inner Eric Cartman this morning after reading the SEC’s spirited defense of its broad authority to adopt disclosure rules that begins on p. 97 of the Cybersecurity Disclosure Rules Adopting Release. Here’s an excerpt:
Disclosure to investors is a central pillar of the Federal securities laws. The Securities Act of 1933 “was designed to provide investors with full disclosure of material information concerning public offerings of securities.” In addition, the Securities Exchange Act of 1934 imposes “regular reporting requirements on companies whose stock is listed on national securities exchanges.” Together, the provisions of the Federal securities laws mandating release of information to the market—and authorizing the Commission to require additional disclosures—have prompted the Supreme Court to “repeatedly” describe “the fundamental purpose” of the securities laws as substituting “a philosophy of full disclosure for the philosophy of caveat emptor.”
This bedrock principle of “[d]isclosure, and not paternalistic withholding of accurate information, is the policy chosen and expressed by Congress.”362 Moreover, “[u]nderlying the adoption of extensive disclosure requirements was a legislative philosophy: ‘There cannot be honest markets without honest publicity. Manipulation and dishonest practices of the market place thrive upon mystery and secrecy.’”
The discussion goes on to identify specific statutory provisions granting the SEC broad disclosure authority, and also provides numerous examples of where the agency has exercised that authority.
The SEC’s claim to broad rulemaking authority has been challenged by conservatives in recent years, and I suspect that the arguments the agency makes in the 10 pages that it devotes to this topic in the release are likely to resurface in much expanded form in the lawsuits that are likely to arise challenging many of the rules on its current agenda.
Think long and hard before clicking “send” on an email or text message in which you’ve embedded an emoji, because this recent Foley blog says that if you opt to add this little bit of fun to your message, you might have just created a binding contract:
In this age of digital communication, it was only a matter of time before emojis found their way into legally binding documents. Emojis are now being used as a means of expression and communication in various spheres of life, including the discussion of contracts. In fact, a Canadian court recently ruled that a thumbs-up emoji counted as a contractual agreement (read more here).
Whether or not the sender meant “message received” or they were actually agreed to the contract terms, the recipient assumed the thumbs up was a green light to move forward, and the court agreed. Startup founders deal with contracts on a regular basis, from investors to vendors to outside service providers, and one wrong thumbs-up could potentially spell trouble.
The blog goes on to address the factors which might result in the creation of a binding contract through the use of an emoji, but a better alternative may be to just act like a grownup and steer clear of their use in any setting where creating a binding contract is even a remote possibility. Or, if you can’t bring yourself to do that, then at least use my man Shruggie here ¯\_(ツ)_/¯ as your default emoji option.
Last month, SolarWinds filed an 8-K disclosing that certain of its current and former executive officers and employees, including its Chief Financial Officer and Chief Information Security Officer, received “Wells Notices” from the SEC’s Division of Enforcement in connection with agency’s investigation of the massive Russian cyberattack against the company. A recent BankInfoSecurity.com article says that the SEC’s unusual decision to name a corporate CISO as a potential target in an enforcement action might be a signal as to what the agency is focusing on:
It’s unusual for a CISO to receive a Wells Notice, and this SEC move could signal a whole new set of potential liabilities for CISOs, Equifax CISO Jamil Farshchi wrote in a LinkedIn post on Monday. Usually, a Wells Notice names a CEO or CFO for issues such as Ponzi schemes, accounting fraud or market manipulation, but those are unlikely to apply to a CISO, he said.
Farshchi speculated that the notice might be related to “a failure to disclose material information – things like failing to disclose the gravity of an incident or failing to do so in a timely manner could conceivably fall into this category,” he said, adding that it’s too early to know if any action will follow the Wells Notice.
“But if this is about disclosure, it shows the SEC isn’t sitting around waiting for cyber regs to be issued,” he added. “They’re taking action today.”
The issuance of a Wells Notice to SolarWinds’ CISO has attracted a lot of attention in the cybersecurity industry – and that’s likely not an unintended consequence. Maybe I’m just a cynic, but SolarWinds CISO strikes me as exactly the kind of high-profile individual that the SEC’s Division of Enforcement likes to have as a poster child when it wants to send a message through an enforcement action.
The Delaware Chancery Court recently dismissed a books & records action against The Walt Disney Company premised on alleged breaches of fiduciary duty by the company’s board arising out of its decision to publicly oppose Florida’s “Don’t Say Gay” legislation. The plaintiffs’ contended that the directors breached their duty of loyalty by placing their personal beliefs ahead of the company’s interest by taking positions that impaired its value.
This excerpt from a recent Wilson Sonsini memo on the decision summarizes Vice Chancellor Will’s reasoning:
The court conducted a trial on a paper record, and that record reflected an appropriately engaged and deliberative board. As the controversy first flared, the Disney board convened a special meeting and, shortly thereafter, held a regularly scheduled meeting to discuss the issues. Board minutes captured the board’s engagement. The record showed that Disney leadership took an increasingly public stance in the face of intensifying criticism from its employees and creative partners. Accordingly, the court noted, the board’s decision did not come “at the expense of stockholders.” Rather, the board was motivated by an understanding that “a positive relationship with employees and creative partners is crucial to Disney’s success.”
As such, the court determined that “[i]t is not for this court to question rational judgments about how promoting non-stockholder interests—be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture—ultimately promote stockholder value.” Meanwhile, no evidence supported the plaintiff’s allegation that the directors’ personal beliefs or their support of organizations that opposed HB 1557 swayed them to act contrary to the interests of the company and its stockholders.
Based on her analysis, Vice Chancellor Will ultimately concluded that the plaintiff did not establish a proper purpose for inspection because it did not sufficiently allege potential wrongdoing by the board. In an era where companies increasingly find themselves caught in the crossfire of contentious social issues, boards and their advisors are likely to find this excerpt from the Vice Chancellor’s opinion on the latitude that directors have under Delaware law exercise their business judgment to be of some comfort:
Delaware law vests directors with significant discretion to guide corporate strategy—including on social and political issues. Given the diversity of viewpoints held by directors, management, stockholders, and other stakeholders, corporate speech on external policy matters brings both risks and opportunities. The board is empowered to weigh these competing considerations and decide whether it is in the corporation’s best interest to act (or not act).
Speaking of books & records, Keith Bishop recently blogged about some changes to Nevada’s corporate inspection statute. One of these changes authorizes a Nevada corporation’s board of to require a stockholder exercising inspection rights to agree to enter into an appropriate confidentiality agreement with the company. That’s a helpful revision, but I thought that the second change Keith points out is more interesting:
The bill makes other changes to the inspection statute, NRS 78.257, and one of those changes may allow corporations to impose limitations on inspection of certain records in their articles or bylaws:
The right of stockholders to inspect the [corporate records] books of account and financial statements of the corporation in accordance with this section may not be limited in the articles or bylaws of any corporation.
Thus, the current statute prohibits limitations on inspection of “corporate records” and the bill would limit the prohibition to “books of account and financial statements”.
Nevada already takes a more restrictive approach to stockholder inspection rights than Delaware does, and this change gives Nevada corporations an even greater ability to limit those rights. In recent years, Delaware courts have taken an increasingly broad approach to what may be regarded as corporate “books & records” subject to inspection – including, in some cases, director email communications. By narrowing the statutory language, Nevada corporations will likely be able to make it even more difficult for stockholders to reach these materials through pre-litigation books & records requests.
As Allison Frankel noted in a column earlier this year, Nevada’s management-friendly approach to its corporate statute is something that some high-profile Delaware corporations have decided to take advantage of by reincorporating there. Plaintiffs opposing those efforts have accused the state of having a “no liability regime” – and based on recent case law, they may not be far off in that characterization.
