This morning, it’s my pleasure to welcome Meredith Ervine as the newest member of our editorial team! Meredith has had a distinguished career in private practice, and her securities and corporate transactional expertise make her a great addition to our crew. She also has the kind of friendly and down-to-earth personality and sense of humor that makes it a cinch that you’re going to really enjoy getting to know her.
Meredith also brings an important intangible to the table. As she points out in the next blog, her presence also will help us diversify the mix of bad dad jokes & boomer pop culture references that have been the stock-in-trade of the more geriatric members of the editorial team (yeah Dave, I’m talking about you & me) by adding a more millennial twist. This will undoubtedly appeal to our younger readers and will also reduce the number of times that Liz rolls her eyes when reading our blogs.
If you’re a frequent visitor to our Q&A Forum, you may have already noticed that Meredith has hit the ground running. Meredith will be blogging later this week on the Proxy Season Blog, and you’ll also see her work on the DealLawyers.com Blog next week. Once she settles in, you can look forward to seeing her as part of the blogging rotation here as well. To give you a taste of what you have to look forward too, I’m turning the next blog over to Meredith so that she can introduce herself to everyone.
We’ve posted the transcript for our recent webcast – “The Latest: Your Upcoming Proxy Disclosures” – in which Mark Borges of Compensia and CompensationStandards.com, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of Morrison Foerster and TheCorporateCounsel.net, and Ron Mueller of Gibson Dunn covered the waterfront of issues to consider as you prepare your upcoming proxy disclosures – with lots of attention to pay vs. performance. Check out the transcript for info on:
1. Pay vs. Performance Disclosures
2. Meeting Format
3. Clawbacks
4. Say-on-Pay Trends
5. Showing “Responsiveness” to Low Say-on-Pay Votes
6. CD&A Updates
7. CEO Pay Ratio Considerations
8. Perquisites Disclosure
9. Shareholder Proposals
10. ESG Metrics & Disclosures
11. Proxy Advisor & Investor Policy Updates
12. Status of Other Pay-Related & Human Capital Management Rulemaking
Speaking of proxy disclosure, Corp Fin issued a boatload of Pay v. Performance CDIs on Friday. Be sure to check out Liz’s blog on CompensationStandards.com for the details.
On Wednesday, the Delaware Chancery Court declined to dismiss fiduciary duty claims against a corporate officer arising out alleged oversight failures that allowed “a corporate culture to develop that condoned sexual harassment and misconduct.” The decision marks the first time that a Delaware Court has applied Caremark’s oversight duties to a corporate officer. This Debevoise memo summarizes the basis for the court’s decision:
In a January 25, 2023 decision (In Re McDonald’s Corp. S’Holder Litig., C.A. No. 2021- 0324-JTL (Del. Ch. Jan. 25, 2023)), the Delaware Court of Chancery declined to dismiss claims that a corporate officer, who led the company’s human resources function, breached his fiduciary duties by “allowing a corporate culture to develop that condoned sexual harassment and misconduct.” The plaintiffs claimed that the officer breached a “Caremark” duty by consciously ignoring “red flags” signaling misconduct. Despite the fact that no prior Delaware case had applied Caremark duties to an officer, the court declined to dismiss the claims, finding as a general matter that corporate officers owe a duty of oversight to an equal, if not greater, extent than corporate directors.
In this case, the court held that the bad faith necessary to support a Caremark claim was supported by particularized factual allegations that the officer had himself engaged in acts of sexual harassment, making it reasonable to infer, in the context of a corporate culture that allegedly condoned sexual harassment, that he consciously ignored red flags about similar behavior by others at the company. Moreover, the court declined to dismiss the claim that the officer’s misconduct itself constituted a breach of the duty of loyalty.
While Delaware recently amended the DGCL to permit corporations to ask stockholders to approve amendments to their charter documents eliminating in some cases officers’ liability in damages for breaches of the duty of care, because Caremark claims involve alleged breaches of the duty of loyalty, those charter amendments aren’t much use when it comes to them.
Kevin LaCroix posted a detailed analysis of this case on the D&O Diary this morning in which he raises some concerns about its potential implications:
My concern here is that in light of this decision, it may be easier for plaintiffs to sustain claims that both officers and directors have breached their duty of oversight. In that regard, I note that academic commentators had already raised the alarm that oversight duty breach claims are not in fact the most difficult kind of claim to sustain, and in fact they increasingly are being sustained with alarming frequency.
But that is not my biggest concern about Vice Chancellor Laster’s opinion. My biggest concern is his brief but nonetheless explosive conclusion that allegations of sexual harassment against a corporate officer can state a claim for breach of fiduciary duty. The possibilities for this conclusion to do mischief are incalculable – they raise the possibility that every sexual misconduct claim will become a Delaware Chancery Court D&O claim brought by shareholders in addition to an employment practices liability claim brought by the victim of the alleged misconduct.
NERA Economic Consulting recently released its annual report on securities class actions. Class action filings declined for the 4th consecutive year. Kevin LaCroix recently summarized the NERA report over on the D&O Diary, and here’s an excerpt:
According to the NERA report, there were 205 federal court securities class action lawsuit filed in 2022, down slightly from 210 federal court securities suits filed in 2021. (The NERA report counts multiple suits filed in different circuits against the same defendant as separate lawsuits, as a result of which the NERA count may differ from other published tallies. The NERA report also only counts federal court securities suits, it does not count state court securities filings.)
The recent decline in the number of lawsuit filings relative to the years 2017-2019, when there were annual filings of over 400 new lawsuits, is largely due to “lower levels of merger-objection cases and cases with Rule 10b-5 claims.” The decline in the number of federal court securities suit filings in 2022 represents the fourth consecutive year in the decline in the number of filings.
Lawsuits against companies in the Electronic Technology/Technology & Health Technology and Services sector accounted for 54% of last year’s filings. More than 1/3rd (36%) of federal class action filings involved unregistered crypto offerings, SPACs or COVID-19-related claims.
It’s important to keep in mind that while merger objection lawsuits aren’t being filed as class actions, they aren’t going away. This Bloomberg Law article notes that in recent years, plaintiffs have preferred filing these claims in state court, where they can often avoid judicial scrutiny of their settlements as well as the PSLRA’s limitations on the number of times a person can serve as lead plaintiff.
Earlier this month, I blogged about how we’re going to be changing the way we send out our email distributions of this blog and our other ones. I said we’d give you a heads up in advance of the changeover, and that’s what I’m doing this morning. On February 1st, our daily blog email for TheCorporateCounsel.net will no longer come from Liz’s account. Instead, our blog email will come from Editorial@TheCorporateCounsel.net.
In order to ensure that you continue to receive our blogs without interruption, please follow these whitelisting instructions and share them with your IT folks. Sorry for the inconvenience and thanks again for reading!
If you haven’t had a chance to listen to Tuesday’s webcast on the Rule 10b5-1 amendments, be sure to check it out. Our panel of experts had terrific insights into what the new regime requires and addressed many of the interpretive issues raised by the amendments & new disclosure requirements. We continue to post lots of memos in our “Rule 10b5-1” Practice Area – including this one from Latham & Watkins, which addresses a number of questions arising under the amended rule.
One area of uncertainty is how amended Rule 10b5-1 will apply to an entity affiliated with an insider who has a 10b5-1 plan. Here’s what the memo says about that issue:
I am a director or officer, and I want to establish a trust with its own Rule 10b5-1 trading plan. What cooling-off period applies to the trust, and would the trust’s trading plan be viewed as an overlapping plan in relation to my personal Rule 10b5-1 plan?
It depends on whether you have investment influence or control over the trust. If you do, the trust’s plan should be treated like the plan of a director or officer, subject to the longer cooling-off period of 90–120 days, the limitation against overlapping plans, and all other conditions under amended Rule 10b5-1 applicable to a director or officer. If you do not, then the trust should be treated like a person other than the issuer, director, or officer, thereby subject to the shorter 30-day cooling-off period and not treated as one of your own plans in determining whether you have an overlapping plan.
While this question addresses an insider’s trust, the question of whether the insider influences or controls any entity’s investment decisions is likely to be a key consideration in assessing how the rule applies to other insider-affiliated entities. That’s because when an insider influences an entity’s investment decisions, the entity has the ability to capitalize on MNPI in the insider’s possession.
The anti-ESG strategy pursued by many Republican elected officials has proven to be a winner in red states, and this article from Mother Jones says that those efforts are likely to pick up steam in the coming year. This excerpt provides a preview of coming attractions:
– With Republicans in control of the House of Representatives, the congressman expected to head the Committee on Financial Services, Rep. Patrick McHenry of North Carolina, plans close oversight of the Securities and Exchange Commission and its proposed climate-risk disclosure rules, which he sees as part of a “far-left social agenda.”
– Red-state attorneys general have signaled their readiness to go to court to challenge both the SEC and corporate and Wall Street ESG policies. Notably, they suggested in a letter to BlackRock last year that its activities with net-zero emissions groups raised antitrust concerns.
– The American Legislative Exchange Council, or ALEC, an association of state legislators that gets most of its funding from corporate sources and right-leaning foundations, is pushing for laws barring state pension funds from considering social and environmental factors in their investment decisions.
Interestingly, however, a recent Politico article reports that some cracks may be beginning to appear in the anti-ESG coalition. The article points out that last week, ALEC’s board of directors rejected a proposal that would give states a legislative template to stop doing business with companies that boycotted fossil fuels and says that opposition to anti-ESG initiatives appears to be growing among Republican moderates.
I don’t know that this is a development that’s likely to be high on the list of our members’ priorities, but I feel duty bound to report that yesterday, the SEC announced proposed rules on conflicts of interest in securitizations. Here’s the 189-page proposing release and here’s the two-page fact sheet. This excerpt from the fact sheet summarizes what the proposed rule is intended to accomplish:
New Securities Act Rule 192 would prohibit a securitization participant from engaging, directly or indirectly, in any transaction that would involve or result in any material conflict of interest between the securitization participant and an investor in an ABS, subject to certain exceptions. Prohibited transactions would include, for example, a short sale of the ABS or the purchase of a credit default swap or other credit derivative that entitles the securitization participant to receive payments upon the occurrence of specified credit events in respect of the ABS.
If adopted, the rule would implement Section 27B of the Securities Act. Section 27B was added by Dodd-Frank & prohibits certain securitization participants from engaging in transactions involving material conflicts of interest & requires the SEC to adopt rules implementing this provision. Comments are due by the later of March 27, 2023, or 30 days after the proposal is published in the Federal Register.
I admit I’ve kind of been working myself into a lather recently over on DealLawyers.com about the potential implications of the FTC’s proposed ban on non-competes for M&A. Obviously, the proposed rule’s potential impact on other aspects of corporate life is far greater, so maybe it’s time for me to start frothing at the mouth here too.
Or maybe not. This recent blog from Bryan Cave says that I really need to chill out, because there’s a long way to go and a lot of uncertainty for the FTC to navigate before anything like this proposal could go into effect:
The Proposed Rule’s future is anything but certain. First, the Proposed Rule will be subject to a 60-day comment period, during which stakeholders (including employers) will weigh in on the Proposed Rule and suggest changes. From there, the FTC will review and, as it deems appropriate, incorporate feedback into any final rule it adopts—although, it should be noted, the FTC could decide not to implement any rule at all based on feedback received. The Proposed Rule sets the “compliance date” for all employers as 180 days after publication of any final rule.
Even if a final rule is adopted, it would almost certainly be subject to challenges in court. Indeed, in a statement voting against the Proposed Rule, Commissioner Christine S. Wilson noted that “the Commission’s competition rulemaking authority itself certainly will be challenged,” going so far as to opine the Proposed Rule “is vulnerable to meritorious challenges” because the FTC does not have the authority to implement such sweeping changes without authorization from Congress.
I’d be very surprised if the FTC didn’t move forward with this, because the agency seems to be on a mission here when it comes to banning non-competes. However, the legal arguments for challenging the FTC’s authority to enact such a ban seems fairly strong, and the anti-regulatory agency zeigeist currently prevailing in the judicial branch suggests that the FTC will face an uphill fight in the event of a challenge to a final rule.
Any victory that business representatives may ultimately achieve in court could turn out to be largely symbolic, since this WSJ article says that companies are already beginning to rethink their use of non-competes. That kind of response suggests that the FTC’s action may have prompted some companies to recognize that they’ve overused non-compete provisions – and whatever you think of non-competes with senior execs, it’s pretty hard not to conclude that Corporate America’s gone a little wacko when it comes to their use among lower-level employees.
Between the FTC’s efforts to persuade judges that antitrust laws mean whatever it says they mean and the anti-ESG crowd’s position that group initiatives targeting climate issues involve “climate cartels,” it seems hard to imagine that anyone could stretch traditional antitrust principles any further. Well, Michael Levin at The Activist Investor recently flagged a new article from Prof. Danielle Chaim of Israel’s Bar-Ilan University that says “hold my beer.” Here’s an excerpt from the abstract:
This Article offers a novel — antitrust — perspective on a growing phenomenon in capital markets: institutional investor coalitions. It reveals the anticompetitive risks that investor coalitions pose and challenges the prevailing positive view of this development in capital markets. Traditionally, corporate law has encouraged investor cooperation, regarding it as the solution to the well-known collective-action problem facing public shareholders.
As this Article shows, however, the recent evolution of investor alliances into powerful, orchestrated coalitions often emerge at the border between firms and markets, affecting not only the intra-firm governance arrangements of the companies held by the coalition members but also the capital markets themselves. At the firm–market border, cooperation among institutional investors — even around seemingly benign corporate governance issues — provides an opportunity for tacit collusion that grants members an unfair advantage in the markets in which they compete.
As an example of this anti-competitive conduct, Prof. Chaim cites institutional investor efforts to end the use of dual class structures in IPOs. She contends that because of their buy-side power, this effort “creates a cartel of buyers in the primary market, resulting in two potential economic distortions: (1) abnormal underpricing of dual-class offerings and (2) suboptimal governance arrangements.”
Since I’m on record as saying this whole anti-dual class crusade is one of the most disingenuous “good governance” campaigns ever waged, I get a kick out of this argument. What I love most about it is that it basically says that while institutional investors & their advocates whine about the need for government intervention because “collective action” problems among investors are insurmountable, they’re actually engaging in collective action that’s so formidable it violates the antitrust laws.
Sadly, I think the argument is a stretch & I won’t hold my breath waiting for a court to sign off on it. But a guy can dream, can’t he?
