It sounds like such a simple thing, doesn’t it? You include a bunch of proposals in your proxy statement, and for each proposal, Item 21 of Schedule 14A requires you to disclose the vote required for approval, the method by which votes will be counted, including the treatment and effect of abstentions, broker non-votes, and, to the extent applicable, a “withhold” vote for a nominee in an election of directors. Unfortunately, as generations of lawyers have learned, getting this disclosure right is often far from an easy process.
That’s the bad news. The good news is that this recent Goodwin memo is a very helpful resource for navigating the intricacies of determining and disclosing required votes in your proxy statement. This excerpt addresses the sometimes murky question of whether a particular proposal is “routine” or “non-routine” under NYSE rules:
Although not required by Item 21 of Schedule 14A, as a result of litigation in Delaware, we believe it is appropriate for proxy statements to identify, to the extent possible, which matters up for vote are considered routine (and therefore eligible for broker discretionary voting) and which are considered non-routine.
This is a straightforward exercise for many matters: NYSE Rule 452 explicitly provides that election of directors, say-on-pay, say-on-frequency, adoption or amendments of an equity plan, and shareholder proposals opposed by management are non-routine. In addition, the NYSE has expressed the view that ratification of the selection of independent auditors is routine.
Other matters may be less clear, and the determination is ultimately made by the NYSE. In this regard, companies should check with the NYSE to determine whether a particular matter is routine or non-routine prior to filing the proxy statement with the SEC.
The memo also addresses the need for companies to review state law and their charter documents in order to determine the vote required to approve a particular proposal, quorum requirements and the impact of broker non-votes and abstentions under various voting standards.
With the SEC’s adoption of cybersecurity and climate change disclosure rules looming and intensifying investor scrutiny of disclosure in these areas, this Perkins Coie blog recommends that companies take a hard look at their disclosure controls and procedures to ensure that cyber & ESG matters are appropriately captured. The blog identifies things that companies should keep in mind as they assess their disclosure controls & procedures in these areas. This excerpt addresses key issues in the data collection and verification process:
Determine what data to collect. Companies must determine what data to capture, and until the exact parameters of the final rules are known, should focus on the data most material to their business and industry. Companies can consider industrywide standards or metrics and whether key investors have preferred reporting frameworks. For example, BlackRock asks companies to report using the framework developed by the TCFD, supported by industry-specific metrics, such as those identified by SASB.
Establish data-gathering procedures and systems. Companies need to establish procedures for how data will be collected, where it is sourced, and how it is stored. Company personnel will need to be assigned responsibility over newly implemented procedures and data collection. Depending on the size and complexity of the data to be gathered, automated data management systems offer advantages over manual collection and storage methods. If companies intend to seek third-party assurance over their data, the procedures and systems need to be of sufficient quality and formality to enable testing by third parties.
Determine how data and resulting disclosures will be reviewed and verified. Companies must put in place procedures to vet the completeness and accuracy of the data collected and resulting disclosures. For example, internal controls and segregation of duties should be implemented to prevent and detect data fraud; also, certification and/or sub-certification procedures can be established whereby company personnel review and certify disclosures pertaining to their respective areas of responsibility. At the end of the day, the data and disclosures should be comparable across time, across communication channels (e.g., Form 10-K vs CSR Report), and amongst peers.
The blog says that companies should consider involving outside advisors such as audit firms and consultants in order to help them design internal controls and procedures or to provide assurance services, and should also assess whether any current disclosure committee needs to be reorganized in order to manage the increased challenges of these expanding disclosure obligations.
The SEC appears to be on a hiring spree these days. I recently noted on the DealLawyers.com Blog that the SEC was seeking to hire someone to serve as the Chief of Corp Fin’s Office of Mergers & Acquisitions. Now, the SEC is seeking to fill open spots in Corp Fin’s Office of Chief Counsel, where Dave used to lead the Division’s interpretive function. Dave notes:
The SEC has posted two announcements on the USAJobs website for open positions in Corp Fin’s Office of Chief Counsel. One of the announcements describes the general responsibilities for someone serving in the Office of Chief Counsel, while the second announcement seeks a candidate who has experience with compensation and employee benefit plan issues that arise under the securities laws.
I always say that the time I spent in OCC was the highlight of my career – no where else can you encounter so many questions about every aspect of the laws regulating capital raising and public disclosure. In the old days, getting a position in OCC was usually only possible by rising through the ranks in Corp Fin, so it is great that the Division is now posting these positions for candidates from the outside. For any securities lawyers out there who are considering a new challenge, I encourage you to consider these rare opportunities quickly – the postings close on March 14th.
In December, I blogged about the SCOTUS’s decision to grant Slack Technologies cert petition in a case addressing the application of Section 11 of the Securities Act to direct listings. Slack is appealing the 9th Circuit’s ruling that investors who acquired their shares through the company’s direct listing satisfied Section 11’s tracing requirement. Former SEC Chair Jay Clayton and former Commissioner Joseph Grundfest recently filed this amicus brief in support of Slack’s position. The former SEC bigwigs are being represented by Freshfields, and this excerpt from the firm’s recent blog summarizes their argument:
The Ninth Circuit’s decision in Slack invented an entirely new definition of Section 11 standing that conflicts with all precedent on point. First, The Ninth Circuit’s proposed definition extended liability far beyond the distribution of securities the direct listing. If literally applied, the Ninth Circuit’s definition of standing would dramatically expand Section 11 liability across a vast array of situations that are entirely unrelated to direct listings. It would achieve those results by substituting a judicially implied remedy for the judgment of Congress, regulators, and sophisticated market participants.
Slack also conflicts with the Securities Act’s plain text. Its holding cannot be reconciled with the statute’s damages formula or its fundamental structure, including its exemptive provisions, or with governing SEC regulations. The Ninth Circuit failed to consider sixty other instances in which the phrase “such security” appears in Securities Act, and proposes a definition that is inconsistent with the same term’s meaning in those sixty instances. Legislative history offers no support for the Ninth Circuit’s divergence from established precedent. The Ninth Circuit’s purposive rationale conflicts with norms of statutory construction urged by the Supreme Court.
The amici argue that if tracing creates a problem that needs to be addressed, Congress and the SEC have the ability to address that problem through legislative or administrative action, and that what they contend is a “radical judicial rewrite” of Section 11 is unwarranted.
This recent Locke Lord blog provides a reminder that, effective April 13th, Form 144 filings will have to be made electronically. The blog highlights the fact that for some insiders, changes in traditional filing procedures are going to be necessary:
Currently, Form 144 is typically filed by mailing a paper form on or before the date a sale order is entered, often with the assistance of the seller’s broker. While some brokers are gearing up to assist with electronic Form 144 filings by soliciting consents and obtaining the necessary EDGAR filing codes from their public company officer and director clients, we understand that other brokers will no longer file on behalf of officers and directors.
For public companies that file their officers’ and directors’ Section 16 reports, the transition to electronic filing of Form 144 is likely to lead to officers and directors requesting that they file Form 144 or requesting they provide the individual EDGAR codes (CIK# and CCC#) necessary for brokers to make the electronic filing.
The blog says that for officers and directors who file their own Section 16 reports, the shift to electronic filing of Form 144 is likely to be fairly simple. The SEC has provided guidance and support and the EDGAR filing codes are the same ones that these insiders have used for their Section 16 reports.
The January-February issue of “The Corporate Counsel” newsletter is in the mail (email sales@ccrcorp.com to subscribe to this essential resource). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. This issue includes the following articles:
– Rule 10b5-1(c) Amendments: Get Ready for the New Rules of the Road
– It is That Time Again! Critical Updates to Your Insider Trading Policy
– Special Supplement: Model Insider Trading Policy
Yesterday, the SEC announced the adoption of rules implementing a T+1 settlement system. Here’s the 314-page adopting release and here’s the 2-page fact sheet. According to this excerpt from the fact sheet, the new rules:
– Shorten the standard settlement cycle for most securities transactions from two business days after trade date (T+2) to one (T+1);
– Shorten the separate standard settlement cycle for firm commitment offerings priced after 4:30 p.m. from four business days after trade date (T+4) to T+2;
– Improve the processing of institutional trades through new requirements for broker-dealers and registered investment advisers related to same-day affirmations; and
– Facilitate straight-through processing through new requirements applicable to clearing agencies that are central matching service providers (CMSPs).
The compliance date for the new rules was set for May 28, 2024. That date follows the Memorial Day holiday, on which both the securities markets and banks will be closed. The two dissenting commissioners – I’ll let you guess who they are – both expressed concern that the change was being implemented too quickly and argued that a post-Labor Day 2024 compliance date would be more appropriate.
Although the new rules provide for T+2 as the default settlement cycle for firm commitment offerings priced after 4:30 pm, they continue to permit issuers and underwriters to agree to alternative settlement dates. Personally, I can’t imagine trying to settle a firm commitment deal on a T+1 or even a T+2 basis. It just seems like there are too many moving pieces that can mess up the closing on a timeframe like that.
Maybe my lack of imagination stems from the fact that most of my experience in recent years has been on the debt side, where extended settlement cycles aren’t uncommon (the last deal I worked on before I left my law firm was a debt deal that settled on a T+10 basis). On the other hand, Meredith told me that she’s done some firm commitment equity deals that have settled on a T+2 basis, which may help explain why she decided to make the move away from private practice!
Meredith also pointed out another consequence of the implementation of a T+1 settlement cycle – the move to T+1 shortens the time lawyers have to decide whether a potentially problematic trade by an insider needs to be broken.
High-profile Caremark cases and SEC enforcement actions have focused attention on the ever-higher expectations placed on boards when it comes to risk oversight. This article from Nasdaq’s Center for Board Excellence says that when it comes to risk oversight and crisis management, stakeholders expect directors to roll up their sleeves:
Given the rapidity at which information and news travel today, boards need to be prepared to act when setbacks happen, and crisis management cannot be delegated to executive teams. Shareholders expect the board to actively help navigate all phases of a crisis, from the initial “hair-on-fire” through the post-mortem. One of the most important things for boards to do is to engage, as shareholders and stakeholders expect the board to ensure that appropriate processes are in place to successfully manage a crisis.
The board’s role is to ensure the company has the right processes and people in place to effectively identify and evaluate risk, in addition to approving the risk appetite of the firm on behalf of stakeholders. Developing the risk appetite is critical as it frames how the board will react to any risk-related setback. Boards may consider collaborating with management to establish a risk appetite statement, approaching risk from a macro level. While identifying every single risk is unrealistic, this practice promotes discipline in setting a foundation for enterprise risk
The article says that boards need to understand how information flows through their organization in order to better anticipate unforeseen events. That review should incorporate an assessment of whether information from all viewpoints is welcome, or if the company’s culture is to disregard points of view that may potentially conflict with the general consensus of top management.
Earlier this week, the SEC announced that, effective February 12, 2023, Cicely LaMothe had been named Deputy Director of Disclosure Operations for the Division of Corporation Finance. She has served as the Acting Deputy Director for Disclosure Operations since August 2022, and is a 20-year SEC veteran who has held several senior leadership roles during her career with the agency.
Item 407(h) of Reg S-K requires companies to disclose “the extent of the board’s role in the risk oversight of the [company], such as how the board administers its oversight function, and the effect that this has on the board’s leadership structure.” This Orrick memo says that the Staff issued three dozen comment letters last year asking companies to beef up their Item 407(h) disclosure. Based upon a review of those comments, the memo says the Staff expects to see the following common elements addressed in the risk oversight discussion:
1. Whether and why a company’s board would choose to retain direct oversight responsibility for certain material risks (particularly cybersecurity, ESG and sustainability related risks) rather than assign oversight to a board committee;
2. The timeframe over which a company evaluates risks (e.g., short-term, intermediate-term, or long-term) and how a company applies different oversight standards based upon the immediacy of the risk assessed;
3. Whether a company consults with outside advisors and experts to anticipate future threats and trends, and how often it reassesses its risk environment;
4. How a company’s board interacts with management to address existing risks and identify significant emerging risks;
5. Whether a company has a Chief Compliance Officer, or person serving in a similar role, and to whom this position reports; and
6. How a company’s risk oversight process aligns with its disclosure controls and procedures.
Since these comments were so frequent last year, the memo recommends that companies review their board risk oversight disclosures and address any of the topics raised by the Staff in the comment process that aren’t already covered. In particular, the memo urges companies facing material cybersecurity risks or that have made public statements about climate-related risks to address the first element listed above.
