I think most of us who’ve drafted disclosure for public companies over the years have resigned ourselves to the fact that, aside from the plaintiffs’ bar & a few other folks who get paid to review corporate disclosures, pretty much nobody else reads them – including most investors. Since that’s the case, the question becomes, “What’s the point?” A recent CLS Blue Sky Blog post discussing a new paper, “The Hidden Work of Disclosures” takes a stab at answering that question.
Although the paper approaches this issue from the perspective of mutual funds, I think much of what the authors say has relevant to those who work on the corporate side. They argue that the discipline of disclosure strengthens internal governance, and that this pays dividends to investors whether they read those disclosures or not. This excerpt summarizes their argument on the governance benefits of disclosure:
First, disclosure empowers lawyers.Funds typically assign responsibility for drafting and revising disclosures to fund counsel, and that designation is consequential. Stewardship of the disclosure process elevates the authority of lawyers within organizations that financial professionals would otherwise dominate. SEC-enforced disclosures give lawyers the authority to rein in straying portfolio managers and to say, “This is in your prospectus.… This is how it’s disclosed to shareholders, and this is what we need to do.”
Second, disclosure builds a culture of compliance. Drafting a prospectus and updating it annually is a cross-department exercise recruiting portfolio managers, risk teams, accountants, marketing personnel, compliance officers, and independent trustees into periodic collaborations. Leading this process, in-house lawyers and outside counsel work collaboratively, discerning SEC priorities and requirements for internal teams and translating complex financial frameworks for external audiences.
In-house lawyers acquire the character of “good inspectors” rather than enforcement cops, building trust and gaining access to information, while anticipating problems before they arise. Outside counsel provide an industry-wide view by benchmarking funds’ practices against market trends, which tells funds whether they are safely “in the antelope herd” or “about to get picked off by the lions.” Compliance culture isn’t about altruism. A fund’s reputation for doing the right thing is a highly prized asset that establishes its status within the industry, the trust that the SEC has in the fund, and most important, its brand value among investors.
Disclosure forces institutional learning. Annual reviews compel funds to revisit their disclosures, kick the tires, and reconcile public representations with operational reality. Interviewees described disclosures as the “blueprint,” the “playbook,” and “gold standard,” guiding fund operations from top to bottom with current information. Lawyers, in turn, cross-pollinate among funds—sharing best practices related to disclosure drafting and revision through bar committees, trade associations, law firms, and professional contacts. Disclosure language and compliance methods spread through this network, producing a degree of industry-wide convergence that command-and-control regulation alone could not deliver.
Over on The Business Law Prof Blog, Prof. Ann Lipton cites this paper in support of her opposition to the SEC’s semiannual reporting proposal. As she puts it, “a switch to semi-annual reporting may not simply mean less information to investors; it loosens the obligations of boards, and managers, to oversee the company.”
Meaghan Nelson continues to blog up a storm over on “The Mentor Blog,” which is available to members of TheCorporateCounsel.net. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply clicking the link on the left side of the blog and entering their email address. Here are some of Meaghan’s recent entries:
You’ll love Meaghan’s stuff – she brings a unique perspective to our team and is confronting many of the same challenges a lot of our members face in juggling a career in corporate law with the responsibilities of a young family. I think we probably get more positive feedback from our members on Meaghan’s blogs than just about anything else on the website. If you’re not reading her blogs, you’re missing out!
The SEC’s recent semiannual reporting proposal has given public companies and their lawyers plenty to think about and so has Nasdaq’s decision to move to 23/5 trading later this year. One of the big questions that people are asking is “what’s everyone else planning to do?” To help answer that question, we’ve put together this 18-question anonymous survey in collaboration with our friends at Fenwick & West and Orrick.
This one’s a little longer than our typical quick survey, but it covers a lot of ground, including the likelihood of adopting semiannual reporting, anticipated changes in disclosure practices, insider trading policies, and reactions to Nasdaq’s extended trading hours.
We expect that this anonymous, multiple-choice survey will take you about 10 minutes to complete, and we’ll share the results on this website. You don’t have to be a member of TheCorporateCounsel.net to take the survey, so we invite all of our readers to take a few minutes to complete it. We think you’ll find that it’s worth the effort!
This recent article from Gallagher’s Lenin Lopez addresses the need for companies to update their social media policies in order to ensure that they appropriately cover the issues associated with artificial intelligence. This excerpt discusses how companies should think about AI when crafting social media policies:
AI-enabled tools are increasingly part of how content is created, edited, summarized and shared. Employees may view these tools as convenient when preparing posts, responding to industry developments, drafting captions, summarizing company announcements, translating content or making something technical more accessible. Even when an employee is well-intentioned, the output could be inaccurate, incomplete, off-brand or based on confidential or proprietary information that shouldn’t have been entered into the tool in the first place.
AI isn’t the primary focus of most legacy social media policies and companies don’t necessarily need a separate policy to address these risks. However, they should consider targeted updates within the existing universe of their policies, like those covering social media, confidentiality, communications and information security.
For example, companies may want to consider clarifying that:
– Employees remain responsible for content they post, regardless of whether it’s generated or assisted by AI.
– Confidential or proprietary information shouldn’t be entered into unauthorized tools.
– AI-assisted communications are subject to the same approval, accuracy and recordkeeping expectations as any other content.
These additions can help reinforce existing obligations rather than creating entirely new ones. That is, the underlying regulatory themes — like accuracy, supervision and accountability — remain unchanged, even as the tools evolve.
Other topics covered by the article include social media policy basics, the people who should be involved in drafting the policy, the need for review by outside counsel, what to think about when creating a policy, and how often the policy should be refreshed.
If you’re interested in the use of AI for proxy voting recommendations in contested elections, check out Meredith’s recent podcast with Kekst CNC’s Co-CEO Lyndsey Estin and the co-leader of the firm’s Investor Relations and Contested Situations Practice, Nick Capuano. Lyndsey and Nick joined Meredith to discuss Kekst’s recent analysis of how voting recommendations from LLMs compare to those from the major proxy advisory firms across nearly 50 proxy contests. Topics covered in this 24-minute podcast include:
– How Kekst Conducted their Study
– The Headline: LLM Recommendations Lean toward Activists
– Beyond the Headline: Digging into the Data
– How LLM Recommendations Differed from Each Other
– The Sources and Rationales that Most Persuaded the LLMs
– The Sources and Rationales that Held Less Sway with the LLMs
– What this Means for Company Communications in Proxy Contests
We’ve been cranking out podcasts lately and we have several more in the hopper that we expect to post during the next month. If you’re interested in sharing your insights on a topic that you think would likely be of interest to members of TheCorporateCounsel.net or our other sites, we’d love to hear from you. You can contact me at john@thecorporatecounsel.net or Meredith at mervine@ccrcorp.com.
Last Thursday, the SCOTUS issued its long-awaited decision in Sripetch v. SEC, in which the Court unanimously held that the SEC may obtain a disgorgement award from a defendant in an enforcement proceeding without a showing of pecuniary loss to investors. In his opinion for the Court, Justice Gorsuch reviewed the history of the SEC’s use of the disgorgement remedy, the Court’s 2020 decision in Liu v. SEC limiting the agency’s use of disgorgement, and federal legislative responses to that decision.
Citing a variety of judicial precedent, Justice Gorsuch ultimately concluded that neither the Court’s decision in Liu nor traditional equitable principles required the SEC to establish pecuniary harm in order to use disgorgement as a remedy:
What all these and a great many other cases have in common is this: Applying traditional equitable principles, a court ordered the defendant to disgorge the value of the gain attributable to his invasion of the plaintiff ’s legally protected interests without requiring a showing of pecuniary loss. And to know that much is enough to know the answer to this case. Whatever else traditional equitable principles demand, they do not require a showing of pecuniary loss before a court may issue an award of unjust profits.
This excerpt from Gibson Dunn’s memo on the case summarizes its implications:
– The decision preserves one of the SEC’s most powerful monetary remedies. The SEC may continue to seek disgorgement tied to a defendant’s net profits even where identifying individual investors or quantifying their losses would be difficult.
– The Court’s ruling limits defendants’ ability to resist disgorgement by arguing that the SEC must prove the same type of economic loss required in private securities-fraud suits. The focus remains on whether the defendant received unjust enrichment as a result of the securities-law violation and whether the disgorgement award is properly limited to that enrichment.
– Because the Court only assumed without deciding that disgorgement under Section 78u(d)(7) is an equitable remedy, defendants can still challenge SEC disgorgement requests seeking to provide the funds to the U.S. Treasury, instead of to investors, on the grounds that they constitute a penalty that implicates Seventh Amendment jury-trial concerns—a concern highlighted in Justice Thomas’s concurrence.
FTI Consulting’s Garrett Muzikowski recently passed along his firm’s thoughts the implications for firms pondering leaving Delaware of Exxon’s successful “JExit” from New Jersey to the Lone Star State. Here’s what FTI had to say:
– Some Support From Big 3 Likely: For Exxon’s proposal to receive 71% support from shareholders despite both ISS and Glass Lewis recommending against means that at least some large institutional investors voted in favor of the proposal. With each of the Big 3 splitting their stewardship teams into two separate groups with different teams and voting priorities, it’s likely these weren’t unanimous “FOR” votes. It’s even possible 1-2 institutions were more against than for. But 71% implies there was at least some large institutional support for this proposal. At the same time, we do know that at least one very large active manager voted against the proposal without much internal debate. We won’t know specifics for all investors until votes are disclosed later in 2026.
– Proxy Advisors Have Drawn a Line in the Sand: For the time being, companies proposing to redomicile to Texas can expect against recommendations from ISS and Glass Lewis. ISS has gone against 13 of 15 Texas proposals, while GL has gone against 12 of 13. Note that ISS has deemed ArcBest’s approach to the optional provisions in Texas as best in class (adopting charter provisions that opt out of higher thresholds for shareholder proposals or litigation). Even despite having identified this approach as “best in class” – ISS STILL recommended against the ArcBest proposal.
We fully expect ISS and Glass Lewis to include redomiciling in their policy surveys this upcoming fall, as they often do with “new” governance topics. We are less confident they will actually change their stance – but that remains to be seen. At a minimum, the survey will provide incremental clarity for issuers going forward.
– Exxon is a Bellwether for Redomiciling: Prior to Exxon, most companies who made such a move had a near-controlling shareholder and/or were small, unknown companies. Exxon is a massive, well-known, public company with a normal shareholder base. Exxon simply filing its preliminary proxy drove a lot of boardroom discussions on the topic. Now that the proposal has comfortably passed, we expect the conversations to pick up in volume and Boards to analyze this much, much closer.
– Key Factors for Investors: Unlike ISS and Glass Lewis, investors seem to be taking a case-by-case approach to redomiciling. For most investors, it’s an assessment of the tradeoff between economic benefit and a potential decrease in shareholder rights. While NPX vote data won’t be available until late September, our back of the napkin analysis of support levels to date (factoring in controlling shareholders) seems to suggest shareholders are assessing companies operational presence in Texas, the way they’ve approached Texas’ optional provisions, and the company’s governance history/profile.
– Hometown Heros are Likely Next: A key reason Exxon chose to reincorporate to Texas was that its headquarters and a significant amount of its people and operations are based in Texas. Texas is Exxon’s home. Companies who can confidently say they are Texas companies will be the next ones to move (and some already are). There’s a lot of variables at play beyond location of the business that go into investor support, but we think the next litmus test is if a company with little to no presence in Texas can also get shareholder support to redomicile. That’ll truly open the floodgates.
For those of you following the DExit trend, its official scorekeeper, UNLV Law School’s Ben Edwards, has recently updated his tally of the migratory activity of Delaware corporations. Spoiler Alert: Texas has been the favorite destination for Delaware emigres in recent months, but Nevada is coming on strong.
As we head into the height of annual meeting season, be sure to check out our informative 25-minute podcast with Cooley’s Reid Hooper & Michael Mencher on some of the key developments during this year’s proxy season. Topics include:
1. Impact of the Staff’s decision to no longer serve as Rule 14a-8 referee
2. Shareholder proposal trends and success rates
3. AI disclosures in proxy statements
4. How boards are dealing with new oversight demands
5. Changes in how companies are addressing DEI-related disclosures
6. Evolution of proxy advisor policies and strategies for responding to adverse recommendations
7. Outlook for the 2027 proxy season
If you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share with our members in a podcast, please email me at john@thecorporatecounsel.net or Meredith at mervine@ccrcorp.com. We’re always looking for new topics and we’d love to hear from you!
The last time we blogged about the folks from the r/wallstreetbets subreddit was during the height of the pandemic’s meme stock craze. I was pretty dismissive of them back then, but I’ve gotta tip my hat to them for the comments they recently submitted on the SEC’s semiannual reporting proposal. Not only do they raise some pretty good points, but they do so through an endearing and amusing mix of self-deprecation and sarcasm. For example, there’s this:
We understand the Commission is more accustomed to receiving comment letters from people who use words like “stakeholder ecosystem,” and we will try to keep up. A word on who we are, we are self-directed retail investors. Some of us are very good at this and some of us are, in the technical securities law sense, terrible at it. Many of us learned what a 10-Q was the hard way, which is to say we bought a stock, watched it fall 40% on an earnings release, and then read the filing to find out why. That is a stupid order of operations and we acknowledge it. But it is also the entire mechanism by which a generation of retail investors taught itself to read financial statements, and the Commission is now proposing to cut that mechanism in half.
And then there’s this:
We also want to register, respectfully, our objection to the suggestion that quarterly reporting is a burden the Commission can lift to help companies focus on the long term. The companies we trade are not being held back from greatness by the obligation to file four reports a year. Apple files a 10-Q every quarter and has nine hundred billion dollars in cash equivalents. Nvidia files a 10-Q every quarter and is worth more than the GDP of most G20 countries. The entire S&P 500 files a 10-Q every quarter, and the S&P 500 is at an all-time high. If quarterly reporting is crushing American capitalism, American capitalism is hiding it well. We have looked.
To paraphrase Jerry Maguire, you had me at “that is a stupid order of operations. . .” The only negative is one that undoubtedly would have been pointed out to the authors by their fellow Redditors if this was posted on that website – it’s a 750 word wall of text without any paragraph breaks. The folks at Securities Docket flagged this problem as well, and commented “C’mon man! Just hit “Return” on the keyboard a couple times!”
Still, I wonder if Securities Docket may be pointing the finger at the wrong culprit. This seems to be a problem with a lot of comments on the SEC’s website that don’t attach a .pdf, so maybe the problem is with the SEC’s interface? In any event, whoever is to blame obviously hasn’t gotten the message that every Reddit user has heard repeatedly – “paragraphs are your friend.”
UCLA Law Professor Stephen Bainbridge recently submitted a comment letter supporting the SEC’s proposal to permit semiannual reporting. Among other things, the letter acknowledges that a “status quo bias” will deter many companies from initially making the switch, and then goes on to speculate about what types of companies are likely to eventually opt-in. These excerpts provide some details:
Smaller Companies with Higher Reporting Costs. The most natural candidates for electing semi-annual reporting are smaller reporting companies for whom the compliance burden of quarterly reporting is highest relative to the informational benefit investors derive from it. As noted above, the quarterly preparation of Form 10-Q—including financial statement preparation, auditor review, MD&A drafting, and officer certification—imposes fixed costs that fall disproportionately on companies with smaller finance and legal functions.
Companies with Longer-Horizon Investor Bases. Companies whose investor bases have longer investment horizons are also more likely to elect semi-annual reporting successfully. Companies with significant founder or family ownership, companies backed by patient institutional capital, and companies in industries where current-period earnings are poor proxies for long-run value are natural candidates.
Industry Considerations. Certain industries present a natural fit for semi-annual reporting. Companies engaged in long gestation projects—biotech and pharmaceutical firms awaiting regulatory approvals, capital-intensive infrastructure and energy companies, and early-stage technology firms where current losses are priced against multi-year growth expectations—may find that quarterly disclosures add little decision-relevant information for investors already pricing future cash flows over extended horizons. The IPO evidence discussed above supports this intuition: investors in such companies are demonstrably capable of thinking far beyond the current quarter.
Prof. Bainbridge suggests that the companies least likely to depart from quarterly reporting are those with large & active institutional ownership and those in industries, like financial services, retailers with seasonal patterns, and cyclical business, where quarterly results are highly material to market valuations.
