In late October, Glass Lewis announced the results from its annual policy survey. You might be wondering, “does this still matter, since Glass Lewis is moving away from its house policy?” The answer is “yes,” for a few reasons:
1. That move isn’t happening until 2027.
2. Even after the “house policy” disappears, Glass Lewis is still going to provide research and perspectives to clients – it’s just that everything will be more customized, which is already happening at a certain level. Glass Lewis says results from the policy survey inform its case-by-case analysis of company circumstances in the research and filters that it provides to its global client base.
3. The policy gives insight into investors’ current views on several hot topics – including reincorporation, board and workforce diversity, bylaws restricting shareholder proposals and derivative suits, disclosure of executives’ personal security costs and other executive compensation info, response to “anti-ESG” sentiment, and more.
Here are a few key takeaways:
– 85 percent of investors and 76 percent of non-investors say they do not base governance votes solely on financial performance.
– With Texas and Nevada amending their laws to attract more companies, 50 percent of investors are focusing more on shareholder rights when assessing reincorporation.
– 44 percent of U.S. investors view the CEO-to-median-employee pay ratio as “not important”, compared to just 8 percent of non-U.S. investors.
– U.S. based investors are far more likely to ignore diversity factors in their evaluation of boards (42%) compared to investors from other regions (6%).
When it comes to providing research & recommendations that take into account non-financial factors, that’s a pretty important question (and response) for the proxy advisors. John blogged recently that Texas AG Ken Paxton announced an investigation of ISS & Glass Lewis – another shot across the bow after a court temporarily blockedSB 2337 while challenges to that bill proceed to trial early next year.
On that note, here’s more color on how investors and non-investors are evaluating reincorporation, based on survey responses:
Over the past year, many U.S. states have amended their corporate laws to attract or retain companies. Changes include establishing specialized business courts, providing increased protection for directors, officers, and controlling shareholders, reducing litigation risk, and providing greater clarity on the standards for director independence and/or disinterestedness.
In response to this shifting landscape, half of investors reported that they are putting more emphasis on shareholder rights and protections (compared to just one-third of non-investors. Conversely, compared to investors, non-investors were over twice as likely to have become more favorable to company-friendly laws and statutes, litigation risk, and protecting directors, officers and controlling shareholders.
Glass Lewis typically publishes its policy updates in November or December. Stay tuned!
Delistings have been top of mind for some folks lately, especially in light of steps that Nasdaq has been taking to accelerate the process for some types of non-compliance. Specifically:
– Meredith recently flagged a couple of Nasdaq proposals that – if approved – will accelerate delistings for stocks trading at low prices and for companies with low public float.
– Nasdaq amended its rules earlier this year to accelerate delistings for companies failing to meet the minimum bid price requirement.
So, a recent Deep Quarry newsletter caught my eye, where Olga Usvyatsky summarizes the most common reasons for delisting notices that are being reported on Form 8-K. Here’s what she found:
1. Listing Standards – Price, Market Value & Financial Condition. Non-compliance with quantitative listing standards, such as minimum bid price, market value, equity, or net income, comprises about 56% of the cases.
2. Late SEC Reports/Filing Deficiencies. Non-compliance with timely disclosure requirements, including a failure to file annual or quarterly reports, comprises about 21% of the cases.
3. Other – mostly M&A related withdrawals. Voluntary withdrawal requests, typically amid an M&A transaction, comprise about 16% of the cases. Note that this category refers to a voluntary withdrawal request amid a strategic decision and is not an acknowledgement of a deficiency.
4. Public-interest or SPAC-related concerns comprise about 5.1% of the cases, with common reasons including concerns about a company being a “public shell”, concerns about issuance of securities that cause a substantial dilution, Chapter 11 petitions, and SPAC-specific issues related to inability to complete an acquisition within a prescribed timeframe.
5. Governance and shareholder rights lapses category comprises about 4.5% of the cases, comprised primarily of failures to hold annual meetings (1.8% of the cases), deficient board compositions (1.4% of the cases), and failures to adopt compensation clawback policies (0.6% of the cases).
If you’re working with a company that’s received a delisting notice or is heading in that direction, I shared a template compliance plan last year that may help you chart a path out of the wilderness.
1. Julie’s journey to becoming the CEO of Karrikins Group, and why she decided to get her PhD in Organizational Communication.
2. Why the “how” of leadership matters.
3. Key conversations that help boards and executives navigate decisions, including the importance of naming short-term and long-term tradeoffs.
4. How building alignment at the board level impacts corporate culture and success.
5. How Julie’s experience as an Ironman triathlete affects her perspective.
6. Julie’s advice for the next generation of women governance trailblazers.
To listen to any of our prior episodes of Women Governance Trailblazers, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are governance trailblazers whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Drop me an email at liz@thecorporatecounsel.net.
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.
