Yesterday, Corp Fin issued Staff Legal Bulletin 14L, which rescinds Staff Legal Bulletins 14I, 14J and 14K, and effectively takes a sledgehammer to four years of interpretive guidance on the exclusion of ESG-related shareholder proposals from proxy statements. In doing so, the new SLB may open the door for the inclusion of a wide range of previously excludable ESG proposals.
SLB 14I was issued in 2017 and addressed, among other things, the scope & application of Rule14a-8(i)(5) (the “economic relevance” exception) & Rule 14a-8(i)(7) (the “ordinary business” exception). In SLB 14I, Corp Fin observed that the key issue in evaluating both the economic relevance and ordinary business exceptions was whether a particular proposal focused on a policy issue that was sufficiently significant to the company’s business, and called for the board’s analysis of the significance issue to be contained in any no-action request. SLB 14J & 14K subsequently provided further interpretive guidance on these topics, and also addressed in some detail when proposals may be excluded under the ordinary business exception because they involve “micromanagement.”
Yesterday’s action effectively trashes the approach to the economic relevance & ordinary business exclusions outlined in these SLBs. Instead, SLB 14L says that Corp Fin will return to its traditional approach to social policy proposals:
Going forward, the staff will realign its approach for determining whether a proposal relates to “ordinary business” with the standard the Commission initially articulated in 1976, which provided an exception for certain proposals that raise significant social policy issues, and which the Commission subsequently reaffirmed in the 1998 Release. This exception is essential for preserving shareholders’ right to bring important issues before other shareholders by means of the company’s proxy statement, while also recognizing the board’s authority over most day-to-day business matters.
For these reasons, staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.
Under this realigned approach, proposals that the staff previously viewed as excludable because they did not appear to raise a policy issue of significance for the company may no longer be viewed as excludable under Rule 14a-8(i)(7). For example, proposals squarely raising human capital management issues with a broad societal impact would not be subject to exclusion solely because the proponent did not demonstrate that the human capital management issue was significant to the company.
In light of Corp Fin’s return to a non-company specific approach to the significance of a social policy issue, Corp Fin says that it will no longer expect a board analysis as described in the rescinded SLBs as part of demonstrating that the proposal is excludable under the ordinary business exclusion. SLB 14L adopts a similar approach to the economic relevance exclusion, and therefore will also no longer require a board analysis here either.
SLB 14L also addressed the micromanagement exclusion, and observed that the rescinded guidance may have been taken to mean that any limit on company or board discretion constitutes micromanagement. In doing so, Corp Fin noted that “specific methods, timelines, or detail do not necessarily amount to micromanagement and are not dispositive of excludability.”
It’s a certainty that there will be a lot of commentary in the coming weeks about how much of a departure SLB 14L represents from actual Staff practice versus what was laid out in the now rescinded SLBs. But in any event, Corp Fin seems to be sending a message that the proponents of ESG-related topics are likely to face a friendlier environment than they have in recent years. That’s a message that won’t be lost on those proponents, who still have plenty of time to submit proposals for next proxy season.
Corp Fin addressed several other topics in SLB 14L, including the use of images in shareholder proponents’ supporting statements, issues surrounding proof of ownership letters, and the use of emails to submit proposals and deficiency notices. Here are some excerpts from Corp Fin’s discussion of these topics:
Use of images in supporting statements – “Questions have arisen concerning the application of Rule 14a-8(d) to proposals that include graphs and/or images. The staff has expressed the view that the use of “500 words” and absence of express reference to graphics or images in Rule 14a-8(d) do not prohibit the inclusion of graphs and/or images in proposals. Just as companies include graphics that are not expressly permitted under the disclosure rules, the Division is of the view that Rule 14a-8(d) does not preclude shareholders from using graphics to convey information about their proposals.”
Proof of ownership letters – “Some companies apply an overly technical reading of proof of ownership letters as a means to exclude a proposal. We generally do not find arguments along these lines to be persuasive. For example, we did not concur with the excludability of a proposal based on Rule 14a-8(b) where the proof of ownership letter deviated from the format set forth in SLB No. 14F. In those cases, we concluded that the proponent nonetheless had supplied documentary support sufficiently evidencing the requisite minimum ownership requirements, as required by Rule 14a-8(b). We took a plain meaning approach to interpreting the text of the proof of ownership letter, and we expect companies to apply a similar approach in their review of such letters.”
Use of email – “Unlike the use of third-party mail delivery that provides the sender with a proof of delivery, parties should keep in mind that methods for the confirmation of email delivery may differ. Email delivery confirmations and company server logs may not be sufficient to prove receipt of emails as they only serve to prove that emails were sent. In addition, spam filters or incorrect email addresses can prevent an email from being delivered to the appropriate recipient. The staff therefore suggests that to prove delivery of an email for purposes of Rule 14a-8, the sender should seek a reply e-mail from the recipient in which the recipient acknowledges receipt of the e-mail. The staff also encourages both companies and shareholder proponents to acknowledge receipt of emails when requested.”
Several members have already pointed out another issue that SLB 14L raises regarding proof of ownership letters. At one point in the discussion, Corp Fin says that “we believe that companies should identify any specific defects in the proof of ownership letter, even if the company previously sent a deficiency notice prior to receiving the proponent’s proof of ownership if such deficiency notice did not identify the specific defect(s).” This kind of “double notice” is something that hasn’t been required before now.
I can’t recall ever seeing commissioners issue a dissenting statement from a Staff Legal Bulletin – well, at least until now. Commissioners Peirce and Roisman issued this statement on SLB 14, which, to say the least, they find perplexing:
The rationale for today’s action is a bit of a mystery. First while the bulletin lays out a case for repealing the last three bulletins, it does not fill the void left by their repeal. Specifically, it fails to address the problem those three bulletins were trying to solve, whether it still exists, and how it will be addressed going forward. For example, with respect to the significance analysis under Rule 14a-8(i)(7), the rescinded bulletins were designed to help issuers determine whether a proposal dealing with the company’s ordinary business operations is nevertheless not excludable because it raises a policy issue so significant that it transcends the day-to-day business matters of the company. With these bulletins now rescinded, how should these proposals be analyzed?
They also point out that the SLB doesn’t address the “criteria, timeframe or proof” necessary to support a finding that a topic is socially significant or has a broad societal impact, and suggest that the return to the prior standard will only exacerbate the massive burden on the Staff associated with the process of refereeing Rule 14a-8 proposals. It’s hard to argue with that last point.
Last year, the SEC amended Reg S-K’s financial disclosure rules, including several provisions of Item 303, which governs the content of the MD&A section of periodic reports and registration statements. This Bryan Cave blog provides a reminder that the new rules are now in effect, and that compliance will be required in any report filed for a fiscal year ending on or after August 9, 2021, So, if you’re a Sept. 30 fiscal year end company, this means you!
This excerpt points out that although the new disclosure requirements were intended to streamline the MD&A, they shouldn’t be read in a vacuum:
The 2020 amendments were adopted by the SEC in a 3-2 vote along party lines. Since that time, the composition of the SEC has changed, reflecting President Biden’s appointment of Gary Gensler as Chair of the SEC. The pendulum may be swinging back, at least somewhat, from principles-based disclosure to rules-based disclosure. Accordingly, while companies must comply with the current MD&A requirements of Item 303 of Regulation S-K, those requirements should be read in conjunction with other recent guidance, such as the SEC’s recently published sample comment letter on climate change discussed in our September 23, 2021 post.
The blog also points out that the SEC is expected to propose climate change and potentially other ESG disclosure requirements in the coming months. Those proposed rules are unlikely to become effective before the upcoming reporting season, but they still may impact investor expectations and Staff comments.
If you’re looking for a refresher to help you comply with the new MD&A disclosure rules, check out this slide deck from Bass Berry. In today’s first blog, I noted Bryan Cave’s statement about not reading these rules in a vacuum. The SEC’s decision to eliminate the specific line item requirement to disclose the impact of inflation illustrates that point. It appears that the SEC dropped that line item just in time for the issue to become relevant again for many businesses. As this excerpt from the deck points out, the new rules may not single out inflation, but it still needs to be discussed if material:
– Eliminated prior Item 303(a)(3)(iv) which required discussion of the impact of inflation and price changes, and related prior Instructions 8 and 9.
– Adopting release notes that a discussion of inflation or changing prices will be required if they are part of a known trend or uncertainty.
– Further, amended Item 303 requires disclosure of the underlying reasons for material changes to financial statements from period-to-period, which may implicate a discussion of inflation and changing prices
For calendar year companies, the new year begins with the most hectic period of the annual reporting cycle. That’s particularly true for new public companies, which haven’t previously experienced the year-end reporting & proxy frenzy. If this is your first rodeo – or even if it’s not – check out this Harter Secrest memo for tips on how to use this year’s Q4 to make your life easier during next year’s Q1. This excerpt provides some tips on putting together an annual meeting timetable:
Starting with a proposed annual meeting date and working backwards to schedule deadlines for the many workstreams involved in the annual meeting can help your team stay organized throughout one of the busiest times of year and eliminate last-minute surprises. Consider including the following in your timetable:
– Board and committee meetings relating to annual meeting approvals.
– Critical deadlines, such as (i) the record date, (ii) broker search deadline, (iii) dates to deliver materials to your financial printer, (iv) last date to file the proxy statement to incorporate information by reference into the Form 10-K, and (v) last date to file the proxy statement to be able to use notice and access.
– Target dates to send drafts to outside experts and to receive comments back from them.
– Section 16-related tasks: (i) Form 5 deadline; (ii) Schedule 13D or 13G deadline, and (iii) if tied to year-end reporting or meetings, any planned equity grants requiring Section 16 reports.
The memo also provides tips on getting a jump on your D&O questionnaires and 10-K preparation efforts.
Remember a few years ago, when a counterfeit letter purporting to be from BlackRock’s Larry Fink hit the street? Well, the folks who did that apparently had so much fun that they did it again – this time to Vanguard. This excerpt from an Institutional Investor article explains:
The team behind 2019’s fake letter from BlackRock chief executive officer Larry Fink has struck again. This time, they’ve targeted Vanguard and Marvel Entertainment, pitting the two against one another via dueling press releases sent to journalists on Tuesday. Since then, the Yes Men, a group of activist comedians, revealed that they orchestrated this stunt in an effort to push Vanguard toward action on climate change.
For major asset managers like Vanguard, whose exchange-traded funds require ownership of the market at large, acting on climate change is complicated. But because they’re targeting retail investors more than they have in the past, the general public has begun to push for more change.
On Tuesday, a fake press release from Vanguard announced that the firm had set up a “Sustainable Investments” department that would help it strategize on shareholder engagement. The faux announcement also claimed that by 2030, Vanguard would make “fossil-free and deforestation-free funds [the] default option” for investors, and that it would launch a “Vanguardians of the Galaxy” ESG fund for young investors.
In order to close the loop on the “Vanguardians of the Galaxy” thing, the Yes Men also issued a fake press release from Marvel. Fake Marvel characterized Fake Vanguard’s action as “an offensive infringement” of its intellectual property.
These guys call themselves “activist comedians.” I get the activist part, but where’s the comedy come in? I suppose the “Vanguardians of the Galaxy” reference could be a little funny in a “dad joke” sort of way, but this is a pretty elaborate setup for the tiny comedy payoff these guys deliver. I’ll leave it up to you to decide what kind of impact the activist side of the house has made with these pranks, but from a comedic perspective. . . well, I’lI take Letterkenny over the Yes Men every time.
In case you’re not familiar with it, Letterkenny is a Canadian TV comedy that some of my hockey pals suggested to me. The show’s not for everybody – the language would make a longshoreman blush – but if you like non-stop banter & a steady stream of what hockey players call “chirps” delivered in a distinctive dialect, check it out. I think it’s hilarious.
Anyway, Letterkenny reminds me of how many things we import from Canada, including some legal doctrines that we usually think of as home grown. That’s why I thought you might find this Torys memo about proposed climate change regulations issued by the Canadian Securities Administrators interesting. This excerpt from the memo summarizes the highlights of the proposal:
– The proposed rules would be phased-in over a one-year period for non-venture issuers and over a three-year period for venture issuers. For reporting issuers with a December 31 year-end, disclosures would be required in annual filings due in 2024 for non-venture issuers and in 2026 for venture issuers.
– Issuers would be required to make annual disclosure relating to the core elements of the TCFD framework, including governance, corporate strategy, risk management practices and data and metrics in respect of climate change risks and opportunities.
– Issuers would be required to disclose their Scope 1, 2 and 3 emissions or their reasons for not providing such disclosure. In the alternative, the CSA is considering mandatory disclosure of Scope 1 emissions, with the comply-or-explain option available only for Scope 2 and 3 emissions.
– The CSA has opted not to require disclosure of scenario analysis of a company’s resiliency under various climate transition assumptions.
The areas addressed in the proposed regulations track pretty closely those that SEC Chair Gary Gensler has suggested the SEC may address in its own proposal, and the CSA’s discussion of the proposal indicates that Canadian regulators have had to make the same kind of policy choices that the SEC will be making. Since that’s the case, it may well turn out to be a preview of coming attractions.
The latest issue of The Corporate Executive has been sent to the printer (sign up and order this essential resource today). This month’s articles include:
– Key Takeaways from Our Proxy Disclosure & 18th Annual Executive Compensation Conferences
– Compensation Clawbacks in the Courts
– Two Interesting Cases on Termination for “Cause”
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.
In a recent speech to the ABA’s annual White Collar Institute, Deputy AG Lisa Monaco announced some significant changes to the DOJ’s corporate criminal enforcement policies. In addition to tightening up the requirements for cooperation credit, Monaco said that the DOJ is changing the approach that it takes to classifying companies as recidivists, and rescinding any guidance suggesting that the appointment of corporate monitors is disfavored. This excerpt outlines the DOJ’s new approach to cooperation credit:
To hold individuals accountable, prosecutors first need to know the cast of characters involved in any misconduct. To that end, today I am directing the department to restore prior guidance making clear that to be eligible for any cooperation credit, companies must provide the department with all non-privileged information about individuals involved in or responsible for the misconduct at issue. To be clear, a company must identify all individuals involved in the misconduct, regardless of their position, status or seniority.
It will no longer be sufficient for companies to limit disclosures to those they assess to be “substantially involved” in the misconduct. Such distinctions are confusing in practice and afford companies too much discretion in deciding who should and should not be disclosed to the government. Such a limitation also ignores the fact that individuals with a peripheral involvement in misconduct may nonetheless have important information to provide to agents and prosecutors.
The department’s investigative team is often better situated than company counsel to determine the relevance and culpability of individuals involved in misconduct, even for individuals who may be deemed by a corporation to be less than substantially involved in misconduct. To aid this assessment, cooperating companies will now be required to provide the government with all non-privileged information about individual wrongdoing.
The new policy reverses the Trump DOJ’s 2018 decision to ease the requirements for cooperation credit. When it comes to classifying a company as a recidivist, the new policy says that every brush with the law in its past is now fair game for inclusion in the assessment, not just those involving similar conduct. Finally, it seems pretty clear that under the new policy, the DOJ will be insisting on the appointment of independent monitors more frequently than it has in recent years.
In short, there’s a new sheriff in town. We’re posting memos in our “White Collar Crime” Practice Area.
