Ever since Delaware amended its corporate statute to permit charter amendments exculpating certain officers from damages liability for certain duty of care breaches, companies and their advisors have been anxious to see how ISS & Glass Lewis would react. Glass Lewis became the first firm to definitively address this issue when it issued its 2023 Policy Guidelines last week. Is Glass Lewis on board? Not really:
Under Section 102(b)(7), a corporation must affirmatively elect to include an exculpation provision in its certificate of incorporation. We will closely evaluate proposals to adopt officer exculpation provisions on a case-by-case basis. We will generally recommend voting against such proposals eliminating monetary liability for breaches of the duty of care for certain corporate officers, unless compelling rationale for the adoption is provided by the board, and the provisions are reasonable.
I guess that’s not a definitive no, but I wouldn’t get your hopes up if I were you.
Okay, so we know where Glass Lewis stands on officer exculpation – what about ISS? This guest blog from Orrick’s J.T. Ho and Bobby Bee says that ISS seems to be more open to the concept:
ISS recently released proposed changes to its benchmark voting policies for the 2023 proxy season. Among the 17 proposed policy changes announced was an indication ISS will recommend “FOR” proposals to add officer exculpation provisions in a Delaware company’s charter. Such a charter amendment (an “officer exculpation charter amendment”) would be adopted to implement the August 2022 change in Section 102(b)(7) of the Delaware General Corporate Law permitting corporations to limit or eliminate the personal liability of officers for claims of breach of the fiduciary duty of care. For officers of Delaware corporations, adopting such a charter amendment can bring some parity with existing protection for directors.
While ISS is not expected to release its final U.S. Proxy Voting Guidelines for the 2023 proxy season until mid-December, it has already made a few “FOR” recommendations in line with these proposed policy changes. In making such recommendations, ISS identified the below factors as generally supporting adoption of an officer exculpation charter amendment:
– an expectation the protection afforded by the amendment will become commonplace for officers, and failure to provide could put a company at a disadvantage in recruiting or retaining executives;
– the amendment balances shareholders’ interest in accountability and their interest in attracting and retaining quality agents to work on their behalf; and
– the amendment does not appear to negatively impact shareholder rights and conforms to state law.
ISS will also consider company specific factors such as:
– whether a company is involved in the kind of litigation impacted by the proposed amendment at the time of the proposal; and
– whether a company was otherwise considered a “bad actor” with respect to corporate governance.
As of mid-November, there have been at least ten officer exculpation charter amendment proposals announced, with six already acted upon. Of those six, four were overwhelmingly approved by shareholders, while two failed. However, both failures were due to an inability to gain sufficient voting participation. Actual votes cast were overwhelmingly “FOR” adopting the amendment, just not enough votes were cast to cross the majority, or supermajority, participation mark required for approving a charter amendment.
While the above results are generally a good sign of things to come, Delaware companies considering an officer exculpation charter amendment proposal for the 2023 proxy season should take note of the company specific factors being considered by ISS, and consider the need for a proxy solicitor to ensure any majority or supermajority participation thresholds are met in connection with such a vote.
There have been enough articles, blogs & memos written about best practices in keeping board minutes to fill an entire Practice Area here on TheCorporateCounsel.net, but that doesn’t mean there isn’t room for more. In that regard, this recent series of blogs by Perkins Coie’s Erin Gordon covering best practices before, during and after a board or committee meeting is a worthy addition. This excerpt comes from her second blog, which addresses minute practices during the meeting itself:
Use a clear and concise drafting style that generically reflects the topics addressed and acted upon, and the extent of discussion undertaken. Include defined terms as necessary; minutes should be able to stand on their own.
For more significant decisions or discussions, more detail may be appropriate, but minutes should never be akin to a transcript of the conversation. For executive sessions, even if extended in time, only a high-level overview of the topics for discussion is typically appropriate. If any resolutions are adopted during executive session, use the recitals included in the resolutions to reflect any important considerations or information relied on.
Rule 15c2-11 governs when dealers are permitted to publish quotations for securities. In September 2020, the SEC amended the rule to prohibit them from publishing quotes when current information about the issuer isn’t publicly available. In 2021, the Staff clarified its position that Rule 15c2-11 applies to fixed income as well as equity securities but provided limited-time relief for fixed income securities that were offered pursuant to Rule 144A. This Ropes & Gray memo says that this relief will expire on January 3, 2023, and that means market practice for private Rule 144A issuers will need to change:
While Rule 144A only requires issuers to make financial information available upon request to holders or prospective purchasers of their securities, beginning on January 4th dealers will no longer be able to publish quotations for debt securities in quotation mediums unless financial statements for and certain other information about the issuer are publicly available (for example, on the issuer’s website). Accordingly, issuers may be required to agree to publish financial statements outside of password-protected datarooms currently available only to bondholders and prospective purchasers so that dealers can continue to facilitate a liquid 144A market.
The memo says that various trade groups are lobbying the SEC and Congress to rescind this requirement, but unless action is taken prior to January 3rd, the market will have to deal with this new reality – which may result in a lot more attention being paid to reporting covenants in Rule 144A deals.
Just a few years ago, the audit market for SPACs was dominated by two non-Big 4 firms, Withum & Marcum (see my 3rd blog here). Boy, have things changed. This Bloomberg Tax article says the Big 4 now rule the roost:
When SPACs became Wall Street’s favorite way to take companies public, the Big Four accounting firms steered clear, leaving audit work to smaller outfits churning out hundreds of fast, cheap audits of the blank-check vehicles.
For those freshly minted public companies that emerged from the boom, it’s been a different story. The largest firms — Deloitte & Touche LLP, PricewaterhouseCoopers LLP, KPMG LLP, Ernst & Young LLP and their affiliates— audit almost two-thirds of the approximately 330 companies that went public through special purpose acquisition companies since 2020 and are still trading today, according to Bloomberg data. EY and its affiliates lead the Big Four in the de-SPAC client market, with 65 companies that went public via SPAC on its roster.
The article explains why the Big 4 have jumped into the fray, but here’s my TL;DR version. Anyway, while the auditors found the streets paved with SPAC gold for a couple of years, the article notes that they now find themselves with a lot of problematic clients on their hands.
In light of the findings laid out in the Bloomberg Tax article, I thought this Audit Analytics blog on the 3rd Quarter IPO market was kind of interesting. In addition, to cataloguing the overall grim IPO environment, the blog says that many of the deals that did get done didn’t involve Big 4 auditors:
Auditor Market Share – All IPOs. Twenty different firms audited the 39 companies that completed IPOs during Q3 2022. Friedman led with seven IPO clients. BF Borgers and Marcum followed with four clients each. Friedman and Marcum merged as of September 1, 2022.
Auditor Market Share – Excluding SPACs. When excluding SPACs, there were 20 firms that audited 31 companies. Friedman led with five clients. BF Borgers, Deloitte, Ziv Haft, and Grassi & Co were the only other firms with multiple IPO clients.
If it’s any consolation to the Big 4, the only unicorn to go public during the quarter, Corebridge Financial, was audited by PwC.
Yesterday, the SEC announced the adoption of amendments to Form N-PX that are intended to enhance the transparency of proxy voting by mutual funds, ETFs and other registered funds. At the same time, the SEC also fulfilled one of Dodd Frank’s regulatory mandates by adopting rules requiring investment managers to disclose on Form N-PX how they voted on “say-on-pay” proposals. Here’s the 169-page adopting release and here’s the two-page fact sheet. This excerpt from the SEC’s press release summarizes the changes:
To enhance proxy vote reporting, the amendments will require funds and managers to categorize each matter by type and, where a form of proxy or “proxy card” subject to the Commission’s proxy rules is available, tie the description and order of voting matters to the issuer’s form of proxy to help investors identify votes of interest and compare voting records. The changes also prescribe how funds and managers must organize their reports and require them to use a structured data language to make the filings easier to analyze.
Funds and managers will also be required to disclose the number of shares that were voted or instructed to be voted, as well as the number of shares loaned and not recalled and thus not voted. This latter requirement is designed to provide shareholders with context to understand how securities lending activities could affect a fund’s or manager’s proxy voting practices.
The new rules are effective for votes occurring on or after July 1, 2023 and will be reflected in filings beginning in 2024. They were adopted by the now customary 3-2 vote along partisan lines, and I think it’s gotten to the point where when you read one of our blogs about rule adoptions you should just assume that was the vote unless we tell you otherwise.
Speaking of proxy voting, Vanguard announced yesterday that is adopting a pilot program to allow retail investors in certain of its index funds greater say in how their shares are voted. Here’s an excerpt from Bloomberg’s report on the program:
Vanguard Group is planning a trial to give retail clients more say over how their shares are voted at corporate meetings, as large money managers’ influence over hot-button issues faces mounting scrutiny. Instead of making decisions exclusively on its own, Vanguard will give individual investors in several equity index funds more options about how their shares are voted, the Valley Forge, Pennsylvania-based company said Wednesday in a statement. It will begin testing the strategy early next year.
Under the program, Vanguard will offer investors in selected equity index fund a menu of voting options. These include following the board’s recommendations, choosing to rely on third party guidance or opting not to vote. Vanguard’s action follows on BlackRock’s implementation of its “Voting Choice” program that allows institutional investors to vote the shares they own in BlackRock’s index funds. BlackRock announced that program in the fall of 2021 and began its rollout earlier this year, but as Liz blogged back in June, that program is expanding rapidly. Whether Vanguard will move as quickly on the retail side remains to be seen.
Bryan Cave has recently pulled together a fairly comprehensive checklist of things not to forget about as companies head into the annual reporting & proxy season. The list includes new disclosure and filing requirements, hot disclosure topics, annual governance updates and other matters. This excerpt reviews the new disclosure & filing requirements that companies will need to address this year:
– Universal proxy card requirements are now in effect for most election contests.
– For any director elections, proxy statements must disclose the effect of all voting options, including the effect of a “withhold” vote.
– Companies must also disclose in annual proxy statements the next year’s deadline for a shareholder to provide notice to the company of its director nominees and other information required under Rule 14a-19, the SEC’s election contest rule.
– The new pay-for-performance disclosure requirements will apply to annual proxy statements for companies with fiscal years ending on or after December 16, 2022 – in other words, starting with 2022 calendar year companies.
– Given the complexity of the tabular disclosure and related requirements, companies should begin planning now to address the new requirements for their 2023 annual meetings.
– Companies must now furnish glossy annual reports to the SEC via Edgar in PDF format, effective January 11, 2023.
The blog also reminds companies that if they had their last say-when-on-pay votes in 2017 (e.g., if it was part of the first wave of votes in 2011), then they would need to conduct another vote in 2023.
Liz’s recent blog about the importance of crypto issues made me feel a little guilty, since when it comes to crypto stuff I usually either avoid blogging about it or just make fun of it. So, to atone for my sins against the Blockchain, I offer up this Foley blog, which reviews various ongoing civil and criminal actions involving NFTs. This excerpt from the intro explains why these cases are important:
These actions provide a glimpse into how NFTs will be integrated into existing legal frameworks, and may provide clarity over legal questions that loom large over companies and individuals in the business of creating or selling NFTs. For instance, recent actions show that courts and government authorities are beginning to uncover or take jurisdiction over assets on the decentralized blockchain.
Based on recent indictments, individuals are finding out the hard way that digital assets held on the blockchain—while often thought to be anonymous—are not beyond the purview of government enforcement and cannot be used to hide illicit gains. The methods used to uncover the identities of token or NFT holders may have implications not only for criminal enforcement, but also for actions where the identification or recovery of assets is significant such as divorce and bankruptcy. Recent enforcement activity by the United States and foreign governments should serve as a warning to those who think they can use digital assets for unlawful means.
Specific proceedings addressed in the blog the SEC’s Ripple enforcement proceeding, as well as the US Attorney for the SDNY’s criminal prosecution of the guys allegedly behind the “Frosties” rug-pull caper. But to me, the most interesting piece of litigation covered in the blog is Miramax’s lawsuit against Quentin Tarantino, who was apparently planning to auction scenes from Pulp Fiction in the form of NFTs. That suit was ultimately settled, but I’m sure Tarantino would say that it was yet another example of how “the path of the righteous man is beset on all sides by the inequities of the selfish and the tyranny of evil men. . .”
