When the SEC’s Reg Flex Agenda was published a few weeks ago, John pointed out the somewhat cryptic item of “Rationalization of Disclosure Practices.” Yesterday afternoon, in remarks at the “Financial Markets Quality Conference” at Georgetown, SEC Chair Paul Atkins gave a clearer glimpse into which disclosures could be on the chopping block. This Bloomberg Law article recaps:
Companies sometimes spend several pages discussing risk factors in their annual 10-K reports to meet Securities and Exchange Commission requirements, confusing investors about what’s important, Atkins told reporters at a Georgetown University conference. Firms have risk-averse lawyers who “dump the kitchen sink in,” the Republican said.
“It’s become a repository for too much,” Atkins said. “It’s not serving investors well.”
• The SEC during the first Trump administration required companies to have a risk factor summary of no more than two pages in their 10-Ks, if their reports discussed risks for more than 15 pages.
• Atkins said Thursday the agency also is looking to change rules for companies’ executive compensation reporting to ensure they provide “material” information to investors.
• The SEC’s work to update disclosure rules will happen during the “coming months and years,” the chairman said, without offering more specifics.
Like I said yesterday, the disclosure regime is only piece of the puzzle for public companies – but there is room for improvement!
Keep in mind that a government shutdown could slow down these ambitious rulemaking initiatives. That’s looking like a strong possibility right now – 77% of Polymarket bettors have their money on it as of the time of writing! – but there’s still some time to reach a deal. If there’s no continuing resolution or actual agreement soon, I’m sure John will share reminders next week from our previous editions of “The Government Shutdown Blues” – and color on how things could be different this time around.
Last week, Dave blogged about Corp Fin’s new CDI on filer status. This interpretation has been flying under the radar – but it’s actually a pretty big deal for companies that lose their eligibility as smaller reporting companies under the SRC revenue test – (paragraph (2) or 3(iii)(B) of the SRC definition in Exchange Act Rule 12b-2) – and need to transition to being accelerated filers.
Moving into the accelerated filer category means that a Section 404(b) auditor attestation is required – which adds time & expense to the filing process. According to the CDI – which is No. 130.05 in the “Exchange Act Rules” category – companies have a year after the loss of SRC status to continue as non-accelerated filers (without the expensive auditor attestation). This clarifies Rule 12b-2 in a way that’s different from how some people had been interpreting it – which will be welcome news to SRCs, but keep in mind that the accommodation applies only if the SRC loses eligibility due to the revenue test, not the public float test.
If that’s all clear as mud, take a look at this Filer Status Guide from Cooley. It has flowcharts that show when to evaluate filer status and the questions to ask.
Here’s something Meredith blogged yesterday on The Proxy Season Blog:
On Cooley’s Governance Beat Blog, Broc shared that Exxon has now filed the solicitation materials related to its retail voting program, whereby its shareholders could “opt in” to vote their shares in line with the Board’s recommendation. These are the materials Exxon noted that it planned to file with the Commission pursuant to Rule 14a-12 in its no-action request. It also committed to subsequently filing any material changes to the materials in the same manner. The materials consist of:
– Two email invitations to the program (one for registered holders, one for beneficial)
– Two printed letters to be mailed to shareholders (one for registered holders, one for beneficial) wth QR codes
– Website instructions showing the options to give standing instructions on all matters or give standing instructions on all matters except a contested election or M&A transaction (which options were detailed in its no-action request) — plus terms of the “voting consent agreement” and FAQs
– The confirmation page
Check them out!
As a post-script, I’ll add that in a webinar yesterday hosted by the Society for Corporate Governance, the panelists emphasized that this voting program can be turnkey if adopted by other companies – i.e., other companies can crib from Exxon’s process and filings. Though keep in mind that if anyone wants to change program features – which will probably happen sooner or later – they’d need to seek separate no-action relief for the new fact pattern.
Daved blogged last week about an SEC media statement that the agency is prioritizing a proposal to eliminate quarterly reporting requirements. That same day, Bloomberg and others also reported on similar comments from SEC Chair Paul Atkins.
Does the potential demise of 10-Qs mean all quarterly communications – and disclosure lawyer jobs – will go away? It’s way too early to tell, but my crystal ball says: “probably not.” For example, here’s an excerpt from the Bloomberg article about Chair Atkins’ interview:
He noted that many investors get more information from earnings calls rather than the quarterly reports.
So, there would be disclosure issues involved with the earnings call – maybe even more, in the absence of a 10-Q. This Business Insider article speculates on how the change to reporting requirements could affect us “pencil pushers.” The article repeats the point about investor demands for quarterly earnings – and also points out that “less reporting doesn’t mean less work” – so it’s unlikely our field will fade into oblivion and only be relevant 1-2 times per year. On the other hand:
The biggest losers, people said, may be for-hire professionals called in on an ad-hoc basis to help pull quarterly earnings together, including corporate lawyers and auditors.
In response to the SEC’s 2019 request for comment on this issue, the Society for Corporate Governance filed a report showing that the costs associated with lawyers and accountants were among the most common concerns.
The article says that providers of financial data will also need to adapt.
For now, I’m predicting that if the SEC takes action, “less reporting doesn’t mean less work” – but also “there’s probably a way to do this better.” In his blog, Dave cited to letters from the 2019 request for comment on this issue. Those comments gave reasons and ideas for how information and related disclosure issues will continue to flow – even if the framework isn’t exactly the same as what we have right now.
For example, as this recent Cooley memo points out, companies may need to rethink executive compensation disclosures that currently can appear in Form 10-Qs and would otherwise need to be disclosed in a Form 8-K. As Dave mentioned, companies would also need to give serious thought to insider trading and securities offerings issues.
In a nutshell, “private ordering” can be efficient for some – but may create extra headaches for others.
Yesterday, the SEC and the Commodity Futures Trading Commission announced the agenda and panelists for their joint roundtable about “regulatory harmonization efforts” for crypto-related issues. As Meredith previously shared, the roundtable is scheduled for this upcoming Monday, September 29th from 1 – 5:30 pm ET. Here’s the agenda:
– Panel 1: How We Got Here – This panel will focus on the history of SEC and CFTC relationship.
– Panel 2: Platforms – This panel will focus on how regulatory harmonization efforts could unlock economic value for platforms while continuing to protect investors.
– Panel 3: Participants – This panel will focus on how regulatory harmonization efforts could unlock economic value for platforms while continuing to protect investors.
The roundtable will be webcast and is open to the public – but you have to register if you want to attend in person.
The clock is ticking to register and book your hotel for our upcoming “Proxy Disclosure & 22nd Annual Executive Compensation Conferences” – happening October 21-22 at The Virgin Hotels in Las Vegas. For convenience, we have a virtual attendance option – but we hope to see as many folks as possible in person! Remember that all Conference attendees – whether in-person or virtual – will have access to on-demand replays for a year after the event, as well as our valuable course materials.
This event one of the highlights of my year – I’m so excited to see everyone – and everyone on our Editorial team will be there! To get ready, now’s a great time to revisit the great party – I mean “networking” – tips that Meaghan shared last year on The Mentor Blog in connection with our Conferences:
2. Fancy Meeting You Here – getting pumped up for networking advantages, even if you’re an introvert.
3. Let’s Keep in Touch – your action items for the week after the Conferences!
This year also gives us an extra opportunity to mingle – with our 50th Anniversary Celebration happening October 20th from 4:00 – 7:00 pm. Plan accordingly with your flight & hotel! This is a casual reception open to all PDEC attendees, no need to RSVP. Dave shared more on what to expect in his blog last week.
Dave also recently recapped all of the latest securities regulation announcements that make it more important than ever to attend the Conferences. There will be a lot to talk about and you’ll get practical tips for dealing with the flurry of activity. This is all in addition to Meredith’s “Top 10″ reasons for attending! Be sure to check out our packed agenda and our outstanding lineup of speakers.
If you haven’t already registered, you can sign up online – or contact our team by email at info@ccrcorp.com or by phone at 1.800.737.1271. See you in a few weeks!
Rule 14a-8 – which is the Exchange Act rule about shareholder proposals in company proxy statements – seems to be facing a “make or break” moment. Last week, Dave shared that the House Financial Services Committee recently held a hearing on whether the shareholder proposal process continues to fulfill its intended purpose – and as John flagged, the SEC’s latest Reg Flex Agenda includes proposed rulemaking on “Shareholder Proposal Modernization.”
Even investors seem to be somewhat sympathetic to the resources that some companies spend to respond to large volumes of shareholder proposals. 43% of the investor respondents to ISS’s recent policy survey said that shareholder proponents should make a detailed, company-specific case for each proposal.
We’ve pondered a few times whether there could be a way to use state law to make shareholder proposals more manageable – not only in this blog, but at our Conferences and more than a few happy hour convos with members of this site! Now, more people are noting that the answer seems to be “yes” – at least in Delaware. Kyle Pinder of Morris Nichols Arsht & Tunnell is publishing this article that says there’s no firm basis under Delaware law for a shareholder right to submit non-binding proposals. Here’s an excerpt from the short-form version:
First, the Delaware General Corporation Law (the “DGCL”) does not contemplate (and thus does not expressly authorize) precatory stockholder proposals. Second, under Delaware law, stock ownership confers on stockholders three fundamental rights—to vote, sell and sue — from which flow certain “subsidiary rights.” Precatory stockholder proposals are inherently tied to voting rights (i.e., do stockholders have a right to vote on such proposals).
Based on a review of Delaware’s voting rights jurisprudence, this article concludes that stockholder voting rights extend to (i) the election of directors, (ii) matters committed to stockholders for approval by law, certificate of incorporation, or bylaw, and (iii) matters that the board determines to submit for a stockholder vote (including pursuant to a board decision to subject the company to a regime requiring certain precatory votes). Absent from this list of voting rights are non-binding proposals on which a stockholder forces a vote.
Because no such voting right exists, a “subsidiary right” flowing therefrom to propose precatory stockholder proposals does not exist.
Kyle points out that this gives companies a pretty huge practical advantage:
In the absence of an inherent stockholder right, corporations possess broad flexibility to provide for, and regulate, the submission of precatory stockholder proposals by bylaw provision. Facially valid bylaws are consistent with the DGCL and certificate of incorporation and are not otherwise prohibited by law.
Because stockholders do not have the inherent right to submit such proposals, and assuming the absence of a charter provision expressly granting that right, a bylaw provision providing for, and regulating, precatory stockholder proposals would be facially valid (i.e., it would not be inconsistent with a non-existent DGCL or other legal pronouncement). A reasonably tailored precatory proposal bylaw would allow a corporation to provide stockholders with, what some view as, a meaningful ability while also allowing the corporation to impose structure and safeguards with respect to precatory proposals for which a stockholder intends to solicit proxies.
There is some uncertainty regarding whether a corporation can augment the requirements of Rule 14a-8 by bylaw, although SEC Chairman (then-Commissioner) Paul Atkins and SEC Commissioner Mark Uyeda have each expressed support for private ordering. Therefore, these types of bylaws may also have the potential to apply to Rule 14a-8 proposals.
Kyle goes on to note that while a DGCL amendment may not be necessary to pave the way for these bylaws, an amendment would reduce uncertainty and mitigate litigation risks. As anyone following the “DExit” drama knows, Texas passed a law earlier this year that would allow companies to impose significantly tougher eligibility requirements on shareholder proponents.
We’ve written about the Clayton Act problems that can arise if a director simultaneously serves on boards of competing companies. The issue is easy to overlook – and it isn’t a “one & done” analysis for companies, either. M&A and changing businesses can cause companies to fall within the scope of the statute even if they previously hadn’t been competitors.
This Baker McKenzie alert warns that the DOJ & FTC haven’t lost interest in the issue. In fact, the FTC announced last week that its recent efforts resulted in the resignation of several directors. The Baker McKenzie memo recommends these actions:
– Conduct annual analyses of directors’ and officers’ board memberships to detect any emerging Section 8 interlocks. This is especially important in industries involving organic expansion, such as technology and healthcare, where new competition may emerge quickly.
– Include Section 8 compliance reviews as part of integration planning after closing an acquisition. Mergers and acquisitions can create springing interlocks, as officers or directors of newly acquired companies may serve on boards of companies that compete with the acquiring company.
– Expand compliance reviews to assess non-corporate entities. Section 8 can apply to partnerships or limited liability corporations. Accordingly, broad compliance assessments should be made across business units. Assessments should include managers who serve on non-corporate entities in a capacity that could be viewed as analogous to a corporate officer or board of director role.
– Think carefully about the scope of products and geographies when assessing “competitive sales.” Agencies have urged parties to take a “broad view” of competitive sales, noting that it may apply a different analysis for Section 8 than it would in other antitrust cases. It is therefore important to regularly review (and potentially reevaluate) how product and service revenues are categorized and measured as part of any Section 8 compliance audit.
– Develop strong organizational safeguards, such as firewalls between potentially interlocked executives and procedures for directors handling competitively sensitive information. These steps are essential for compliance. An actual or potential interlocking directorate—regardless of whether it constitutes a violation under Section 8—may facilitate, or be perceived to facilitate, a separate antitrust violation under Section 1 of the Sherman Act or Section 5 of the Federal Trade Commission Act. These safeguards should be developed and implemented even if a Section 8 exemption appears to be applicable.
Earlier this week, the SEC announced the publication of its report to Congress summarizing policy recommendations made during the SEC’s 44th Annual Small Business Forum – which covered:
– Early-stage capital raising
– Growth-stage companies and smaller funds
– Small cap companies and the public markets
The SEC’s Office of the Advocate for Small Business Capital Formation hosted the Forum back in April. This year, our very own Dave Lynn participated as a panelist – he shared reflections a few months ago from his panel on the challenges of going and being public.
The report itself summarizes each discussion and shares the top 5 recommendations for each of the highlighted lifecycle segments – along with the Commission’s response. The SEC will consider Forum recommendations for future policy initiatives.
Video archives and a transcript of the discussions are available online.
Yesterday, ISS Governance published results from its annual global benchmark policy survey, which is part of the process for developing its annual voting policy updates. Among other things, the survey asked investors and companies (non-investors) to share opinions on AI oversight and related disclosures. Here are a few of the key takeaways on investors’ views:
Respondents were asked if expecting a company significantly using AI to use a global framework (for example, OECD AI Principles, NIST AI RMF, etc.) for assessing AI-related risks is appropriate at this time. Non-investor respondents overwhelmingly selected the option “It is probably premature for most companies.” ( 84 percent) while only 16 percent opted for the remaining alternative “It is probably timely for most companies.”
On the other hand, 58 percent of the investor respondents supported the “It is probably timely for most companies” option, and the remaining 41 percent the “It is probably premature for most companies” option.
Respondents’ perspectives were sought on whether companies should publicly share how their boards are overseeing AI business or AI implementation systems with the goal of managing AI-related risks. The preferred option for both categories (54 percent for the investor respondents and 73 percent for the non-investor respondents) was “Only in cases where AI plays a significant role in the business or business strategy (where businesses already have or plan to implement significant AI use).” The answer “In all or most cases – companies/boards which do not consider it relevant can disclose and explain their rationale.” was chosen by 43 percent of investors and 13 percent of non-investors.
Respondents were also asked to what extent a board’s public disclosure of its AI oversight measures indicates its depth of understanding of AI-related issues and risks. Both investor and non-investor respondents expressed a preference for the option “Public disclosure alone does not necessarily imply a board’s solid understanding of AI.” ( 69 and 53 percent, respectively). Slightly less than one-third of non-investor respondents (29 percent) opted for the alternative “There is little general correlation between disclosure and understanding.”
The survey also asked about AI-related board expertise:
40 percent of investor respondents and 25 percent of non-investor respondent opted for the answer “Only companies where AI is central to their core business or poses significant risks would need an AI expert or dedicated committee.“, while the option “Unless AI is central to their core business or poses significant risks, it is sufficient for most boards to have access to external AI advisors when needed.“, was the favored choice of 38 percent of the investor respondents and of 58 percent of the non-investor respondents.
On The Proxy Season Blog for our members, Meredith recently shared a disclosure resource for AI-related opportunities, risks, and governance – and we’ve been tracking trends in disclosures – as well as AI-related shareholder proposals.
We’re also continuing to post resources on compliance & disclosure issues in our “Artificial Intelligence” Practice Area on this site. And don’t forget to sign up for our free blog – The AI Counsel – for daily updates on evolving AI & emerging technology risks.
