The latest issue of the Shareholder Service Optimizer has some timely tips for making your annual meeting run smoothly this year. Here are a couple of important ones:
– Make sure that no one on your Meeting Team agrees to accept “Floor Votes” as a way to head off a formal shareholder proposal: Please be sure to review our article on this crazy process, which a few naïve companies foolishly agree to every year – based on the often-mistaken notion that there will be too few voters to worry about. Brush up here: The Best, Worst and Weirdest Things We’ve Seen in the 2019 Meeting Season to Date
– Beware: Shareholder Proponents, and activists in general, will be monitoring VSMs and paying special attention to the Q&A period, and to whether shareholders are being given a fair chance to ask questions and suffcient time to cast or change their votes online. Here’s a sample ‘run of show’ and tips for the Q&A to avoid being publicly named and shamed: A Sample “Run-Of-Show” For A Satisfying And Successful VSM & The Virtual Shareholder Meeting Q&A – and How to Tackle It
The article also says that the vast majority of companies that went the virtual-only route last year are doing the same this year, and it also reminds companies to identify their shareholder proponents by name. This year, failing to identify the lead proponent could result in a negative recommendation from Glass-Lewis on the chair of the governance committee.
Speaking of annual meetings, don’t forget to attend our “Conduct of the Annual Meeting” webcast on March 30th for more timely tips to help you manage your annual meeting.
The Jim Hamilton Blog recently flagged the competing efforts of Democrats & Republicans on Capitol Hill to influence the substance of the SEC’s climate disclosure rules. Republicans continue to fixate on questioning the SEC’s authority to adopt these rules as proposed, while this excerpt indicates that some Democratic lawmakers continue to push hard for Scope 3 disclosures:
Democrat lawmakers’ recent letter to the SEC specifically addressed another topic the SEC may be mulling as it finalizes the climate risk disclosure regulation—Scope 3 emissions, or what might be considered the proverbial electrified third rail of climate disclosure. The Democrats’ letter said overall that they want the SEC to move forward with a “strong climate disclosure rule without delay.”
While the letter worried about the SEC potentially raising the threshold for disclosure (the proposal pegged the threshold at 1 percent of the specified line-item financial metric), the letter was even more concerned about the prospect that the SEC could weaken or even eliminate Scope 3 emissions disclosures from the final regulation.
The Democrats’ letter references recent Wall Street Journal and Politico reports that the SEC is considering easing the final version of its rules – including possibly eliminating the proposed Scope 3 disclosure requirement – and is clearly an attempt to keep the agency from going wobbly on the final version of its rules.
But with recent reports suggesting that political support for Scope 3 disclosures among Democrats may be on the wane, perhaps it’s worth noting that the letter was signed by only eight senators and 43 members of Congress. That’s a lot fewer than the 130+ Dems who signed an earlier letter supporting the SEC’s rulemaking last summer,
If you’ve worked on more than a handful of private placements over the years, you know that in many situations, issuers opt not to file a Form D with the SEC. I’ve heard a lot of reasons for that over the years, most of which seem to be one version or another of, “well, it’s not a condition of the exemption . . .” followed by some kind of mutterings about confidentiality or concerns about sharing information with the “gubmint.” However, Keith Bishop recently blogged about a new study that suggests another reason why issuers so often don’t file a Form D – the desire to avoid “patent trolls.” Here’s the abstract:
We document that the majority of venture-capital backed financing rounds are not accompanied by a Form D filing. We show that filing behavior is predictable and is related to both the ability to fly below the radar and the benefits of withholding information. Financing rounds that are harder to hide, larger offerings and those previously covered by media, are more likely file a Form D while financing rounds by firms with greater proprietary information, early stage firms or companies in biotech, pharmaceutical, and high tech industries, are less likely to file a Form D.
We document one adverse outcome to the filing of a Form D, patent litigation, and show that protection from this type of litigation through the enactment of anti-patent trolling laws subsequently increases the rate of filing. Firms are less likely to file a Form D once the form is required to be filed on Edgar. Finally, we note that reliance on Regulation D is stronger as the firm nears an exit from the private market. Our results suggests that some firms view even minimal disclosure and regulatory oversight as costly.
Keith points out that one of the authors’ conclusions is that the Form D filing rate among California issuers is particularly low, and that these issuers typically don’t file a limited exemption notice filing at the state level either – which the authors suggest means that at least some issuers may be relying on Reg D as an exemption but not filing the form to ensure their privacy.
If you’re considering not making a Reg D filing, bear in mind a few cautionary points. First, although Securities Act Rules CDI Question 257.07 says that a Form D filing isn’t a condition of the exemption, it is still required by Rule 503. In addition, Rule 507 provides that failure to file a Form D may form the basis for disqualifying an issuer from using the exemption in the future. In addition to potential SEC enforcement proceedings, some states may get their noses out of joint if a state Form D isn’t filed and pursue enforcement actions of their own unless you’ve scoped out a non-filing exemption that you can hang your hat on.
The SEC and other regulators have taken a lot of heat for their approach to cryptocurrency regulation, with the SEC in particular being singled out by various crypto-evangelists for its allegedly unreasonably antagonistic approach to regulating digital assets & alleged reliance upon regulation by enforcement.
The crypto industry & its advocates complain that the SEC’s approach stifles innovation, but this FT Alphaville blog says that by being fuddy-duddies, the SEC & other regulators may have helped prevent the crypto meltdown from turning into a 2008-style financial crisis. The Financial Times doesn’t like it when people excerpt its stuff, so you’ll have to read the blog yourself – but it says that the burden isn’t on regulators to accommodate crypto, but on crypto advocates to prove their vaunted tech is more than just tulips & vaporware.
The blog lauds US regulators for their surprising effectiveness at curtailing crypto’s growth and preventing the ongoing crypto meltdown from spreading its contagion to the broader financial system – noting that even at the peak of crypto mania last year, the entire “value” of bitcoin was a mere drop in the bucket of the overall US capital markets.
In January, the Delaware Chancery Court dropped a bit of a bombshell on Corporate America when it refused to dismissCaremark claims against a former McDonald’s officer premised on failures of oversight that resulted in a corporate culture that condoned sexual harassment and misconduct. The plaintiffs also asserted Caremark claims premised on the same alleged oversight failures against McDonald’s current and former directors, but last week, Vice Chancellor Laster dismissed those claims. This excerpt from Fried Frank’s memo on the decision lays out some of the key takeaways:
On the one hand, McDonald’s appears to expand the potential for Caremark liability beyond the parameters many legal analysts had understood to apply. In the two decisions issued in the case, the court has articulated or clarified, for the first time, that: (i) Caremark duties of oversight apply not only to directors but also to officers; (ii) Caremark duties apply not only to a company’s “mission critical risks” but, depending on the facts, may apply to other key risks even if not rising to the level of “mission critical”; and (iii) sexual harassment and similar issues—and, indeed, “maintaining workplace safety” and “tak[ing] care of the corporation’s workers”—are mission critical risks for companies.
On the other hand, however—and perhaps most importantly as a practical matter— McDonald’s reinforces that there is a high bar to a finding of Caremark liability. The court emphasized that it is only when directors or officers act in bad faith that Caremark liability arises. The court stressed that directors or officers who acted to address a problem of corporate misconduct once they learned of it generally would not be deemed to have acted in bad faith, even if the actions they took were insufficient or reflected poor decision-making (so long as they were not so off the mark as to suggest bad faith).
The memo says that this decision is not inconsistent with the prior decision involving the McDonald’s officer because unlike the corporate officer, the directors took action to address the company’s sexual harassment problem when they were made aware of it. Kevin LaCroix weighed-in on this decision this morning on The D&O Diary, and you should be sure to check out his commentary as well.
Many commenters expressed concern about the implications of the earlier decision, particularly the expansion of Caremark beyond oversight of existential risks. UCLA’s Stephen Bainbridge – who has always been dubious of Caremark – has some insightful & colorful thoughts on that decision as well as this one. Prof. Bainbridge gets a lot of points from me for mentioning Arch Oboler, one of the truly great writers of the radio era and a guy to whom I think shows like HBO’s “True Detective” owe an unacknowledged debt.
In one of its more recent rounds of corporate criminal enforcement guidance, the DOJ noted that in assessing the effectiveness of corporate compliance programs, “prosecutors should consider whether the corporation has implemented effective policies and procedures governing the use of personal devices and third-party messaging platforms to ensure that business-related electronic data and communications are preserved.”
This Perkins Coie memo follows up on the DOJ’s guidance and suggests some practice pointers when it comes to personal device policies for corporate directors. This excerpt addresses some key points to consider in implementing such a policy:
1. A plain English policy on devices. First, a policy is a must. The DOJ’s guidance specifically tells prosecutors that a company should be examined to see if it had—and was effectively implementing—policies and procedures about the use of personal devices.
If I am a director, I want to see a policy written in plain English so I can tell my chief compliance officer and general counsel that I could understand it. And as a GC, I want to make sure that the author has drafted it in truly plain English.
2. Data access, not ownership. The company probably doesn’t want to own my device and all the data on it. However, it does want to have reasonable access to my device for appropriate purposes, including assistance with any future investigations.
In some instances, I’m fine owning my own cellphone. Some companies will want to give me a phone with a request that I use it only for corporate business. This is normal; I will respect any requested limits of use on that company phone. In either case, I want to make sure that I’m maintaining the data in a way that follows the policy.
For example, if I’m using a messaging program, my company may tell me to limit my communications to business matters and send messages solely on an approved platform that enables retention of the messages. I won’t be permitted to use non-approved messaging channels to send business-related messages.
The memo also emphasizes the importance of appropriate training, board oversight and the need to keep an eye on how state privacy laws continue to evolve. In particular, the memo points out that the California Privacy Act will soon require companies to identify personal or personally identifiable information and be able to separate such information from business records.
Check out the latest edition of our “Timely Takes” Podcast featuring my interview with Orrick’s J.T. Ho on the Staff’s comments on board risk oversight disclosure. These podcasts are intended to provide a forum through which experts can share their views on recent developments or emerging trends that we think our members would be interested in learning more about. In this 20-minute podcast, J.T. addressed the following topics:
– Background of Item 407(h)’s board risk oversight disclosure requirement
– Reasons for the Staff’s focus on board risk oversight disclosures
– Do the Staff’s comments reflect its view that there’s a “right way” to do board risk oversight?
– Key takeaways for boards and their advisors
While we’re on the topic of risk oversight, be sure to check out our March 21st webcast – “Managing Enterprise-Wide Risks: The Intersection of ERM & Legal” – where our expert panelists (including J.T.) will address how companies are dealing with the increasing demands for enhanced oversight.
If you have insights on a securities law, capital markets or corporate governance trend or development that you’d like to share, I’m all ears – just shoot me an email at john@thecorporatecounsel.net.
Many Delaware companies are considering asking stockholders to approve officer exculpation charter amendments this proxy season. If you’re working with one of them, be sure to check out this Freshfields blog, which reviews how these amendment proposals have fared with stockholders and proxy advisors and addresses several other matters that should be considered by boards thinking about officer exculpation amendments.
Overall, these proposals have been well received by stockholders. Of the 14 submitted to stockholders so far for which results were disclosed, only three failed – and two of those involved companies that required supermajorities to adopt charter amendments. This excerpt indicates that one reason for this success may be how proxy advisors, and ISS in particular, have responded to these proposals.
Of the 15 companies, ISS recommended FOR the proposals at all companies except for two companies. Both of the AGAINST recommendations involved unusual facts. The first of these two companies did not release a proxy statement (or disclose results) and ISS recommended against all proposals on the ballot. The other was holding a meeting to vote on its de-SPAC transaction, which ISS opposed along with every other proposal on the agenda for the meeting.
For the remaining 13 companies, ISS recommended FOR the exculpation amendment proposal each time. This group that garnered ISS endorsements for their exculpation amendment proposals included companies with less than perfect records on governance and even some where ISS was recommending against the company’s director nominees and/or say-on-pay proposals.
The blog notes that while ISS’s voting guidelines provide that its recommendations on exculpation proposals will be made on a case-by-case basis, taking into account the stated rationale for the vote, in practice, it has generally been supportive of officer exculpation proposals. Glass-Lewis’s voting guidelines appear less accommodating toward officer exculpation that ISS’s. However, the blog says that the high level of support for these proposals suggests that if Glass-Lewis is recommending against them, those recommendations aren’t having much influence on the outcome of the vote.
I think Broc – who is the biggest basketball fan I know – would be annoyed with me if I let the SEC’s recent anti-touting enforcement action against former Celtics star Paul Pierce pass without a mention on this blog. The SEC’s order in this settled proceeding alleges that Pierce’s promotional activities for EMAX tokens ran afoul of Section 17(b) of the Securities Act’s prohibition on touting. Here’s an excerpt from the SEC’s press release:
The SEC’s order finds that Pierce failed to disclose that he was paid more than $244,000 worth of EMAX tokens to promote the tokens on Twitter. The SEC’s order also finds that Pierce tweeted misleading statements related to EMAX, including tweeting a screenshot of an account showing large holdings and profits without disclosing that his own personal holdings were in fact much lower than those in the screenshot. In addition, one of Pierce’s tweets contained a link to the EthereumMax website, which provided instructions for potential investors to purchase EMAX tokens.
Without admitting or denying the SEC’s allegations, Pierce agreed to pay a $1,115,000 penalty and approximately $240,000 in disgorgement. He also agreed to not promote any crypto securities for three years.
This Holland & Knight blog reviews the SEC’s action against Pierce and discusses other celebrities who’ve found themselves targeted by the SEC for alleged touting violations. It also offers up some guidance on avoiding similar situations, and says that crypto’s uncertain status makes it particularly important to watch your step when it comes to promotional activities:
The lack of specific guidance on the issue of “crypto as security” leaves any paid promotional activity of coins or tokens by celebrities, athletes and other influencers vulnerable to an SEC investigation, enforcement action or class-action lawsuit. The risk has only increased as the SEC’s Division of Enforcement has expanded its focus beyond coins and tokens to paid promotional activity in connection with certain NFT (non-fungible token) promotions.
A recent ruling by the U.S. District Court for the Southern District of New York denying a motion to dismiss in connection with a complaint alleging certain NFTs are securities will only add fuel to the flames of this growing fire.14 When in doubt, parties should give careful consideration to proactively disclosing any and all compensation received in connection with any promotional activity involving digital assets.
Great advice, but while it would be wise for our nation’s celebrities to show a little caution here, I still bet it won’t be long until more find themselves in the SEC’s crosshairs for touting. After all, a lot of these folks seem to believe that “Fortune favors the brave.”
The January-February Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This month’s issue includes the following articles:
– Delaware Court Addresses Freeze-Out Merger Confronted with Topping Bid
– Tortious Interference Claims in M&A: Deal Jumping
– Bandera Master Fund: Delaware Supreme Court Defers to General Partner’s Contractual Authority
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without in order to keep up with the rapid-fire developments in the world of M&A. If you’re not a subscriber to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
