Last week, the SEC issued this fee advisory that sets the filing fee rates for registration statements for 2019. Right now, the filing fee rate for Securities Act registration statements is $124.50 per million (the same rate applies under Sections 13(e) and 14(g)). Under the SEC’s new order, this rate will decrease to $121.20 per million, a 2.6% decrease. This reduction modestly offsets the price hikes from the past couple of years.
As noted in the SEC’s order, the new fees will go into effect on October 1st like the last six years (as mandated by Dodd-Frank) – which is a departure from years before that when the new rate didn’t become effective until five days after the date of enactment of the SEC’s appropriation for the new year – which often was delayed well beyond the October 1st start of the government’s fiscal year as Congress and the President battled over the government’s budget.
Recently, the NYC Comptroller & NYC Pension funds compiled 18 “best practice” board matrices from companies that were targeted by the “Boardroom Accountability Project 2.0” – which we’ve blogged about on our “Proxy Season Blog.”
Each of the “best practice” companies discloses director skills on an individual basis. When it comes to gender and race & ethnic diversity, the companies are grouped into two categories: (1) voluntary self-identification of individual directors and (2) aggregate board self-identification.
EYCBM’s “Proxy Season Review” (pg. 2) says that 29% of companies in the S&P 500 are now disclosing director-specific skills – and 17% of companies are disclosing skills on an aggregate basis. Those stats are up from 10% and 1% just three years ago.
SEC’s ALJs Get a “Do-Over”
Remember earlier this summer, when SCOTUS held that the SEC’s ALJ appointment process was unconstitutional? At that time, all pending administrative proceedings were stayed – and there was even some question of whether prior ALJ decisions were valid.
Well, it looks like the SEC is now doubling down on its ALJs. Last week, it issued an order to ratify the appointment of previously-approved ALJs and lift the stay on administrative proceedings, effective immediately. But, there will be completely new hearings in front of a different ALJ for all of those stayed proceedings – almost 200 cases! This Ropes & Gray memo analyzes the order. Here’s an excerpt:
First, the Order attempts to confirm that the SEC has appointed those ALJs as per the Appointments Clause of the Constitution, and that the ALJs may adjudicate cases.
Second, the Order addresses the Lucia majority’s only definitive command regarding a remedial scheme – that Lucia be afforded the opportunity for a new hearing in front of a different ALJ than the one who had previously decided his case. In fact, the Order grants all respondents in the newly un-stayed proceedings the “opportunity for a new hearing before an ALJ who did not previously participate in the matter,” and remands all cases pending before the Commission to the Office of the ALJs “for this purpose.”
Moreover, the Order vacates “any prior opinion” the Commission has issued in nearly 130 matters pending before the Commission. Chief ALJ Brenda P. Murray confirmed via notice on August 23, 2018 (the “Notice”) that another nearly 70 cases pending before ALJs prior to the Order would be reheard pursuant to the Order. As a result of this Order, respondents (and possibly the SEC) who received a negative initial decision from an ALJ prior to the SEC’s Ratification Order but have not yet exhausted their appeal, will now get a fresh “bite at the apple” and a completely new hearing before a different ALJ.
Recently, the IRS issued long-awaited initial guidance – via Notice 2018-68 – on how awards made on or prior to November 2, 2017 can continue to qualify for the “performance-based” exception of Internal Revenue Code Section 162(m) – notwithstanding its elimination by the Tax Cuts & Jobs Act last December. Recall that the result of the tax reform amendments is that companies can’t deduct any “covered employee” pay above $1 million (the definition of “covered employee” was also expanded).
Over on CompensationStandards.com, Mike Melbinger is analyzing all of the “ins & outs” of the new guidance on his blog. Here’s his overview of the framework that will apply:
The guidance answers nearly all of our questions, but it’s not nearly as favorable as we hoped – and not even as favorable as we expected. It contains more than 14 detailed examples, which are more helpful than the text itself. However, the guidance (and the examples) are full of twists and turns and exceptions to the exceptions.
One thing the guidance does make absolutely clear is that the first step in determining whether any payment to any person in any year after 2017 is subject to the draconian limits of Section 162(m) is to determine whether there was a written binding contract in effect on November 2, 2017, which created a legal obligation on the company under any applicable law (e.g., state contract law) to pay the compensation under such contract if the employee performs services or satisfies the applicable vesting conditions. Every one of the many examples provided in the guidance begins with a determination of whether the plan or agreement created a legal obligation on the company. In the examples, some do and some don’t.
The existence of discretion to reduce any promised payment does not always make the full payment subject to the deduction limit of 162(m), but it usually reduces the amount of the payment that is grandfathered. However, the failure, in whole or in part, to exercise negative discretion under a contract does not result in the material modification of that contract.
As we predicted in a few blogs from earlier in the year, the accrued benefits and accounts under non-qualified deferred compensation plans are most likely to qualify for grandfathering protection. In many cases, future payments to the company’s CFO will be grandfathered and remain deductible. However, as we feared, benefits and accounts under plans that reserve to the company the right to amend or terminate the plan prospectively (which includes all well-drafted plans) will only be grandfathered to the extent they are legal obligations as of November 2, 2017.
Art Meyers, Takis Makridis and I will be drilling deeply into this topic (among others) at the upcoming NASPP Conference in our session titled: “Hot Topics in Equity Compensation.” The topic heading is deliberately vague to allow us to cover exclusively issues like this, which have developed or evolved since the deadline for submitting topics and materials for the Conference.
Last week, the PCAOB Staff posted this updated “Audit Report Guidance”– updating original guidance that came out in late 2017. The updated guidance doesn’t say anything new about “critical audit matters” – but it gives more instruction for these areas:
– Voluntarily disclosure about audit participants (including sample language)
– Calculating & describing auditor tenure
– Reporting when other regulators require internal control audits
– Explanatory & emphasis paragraphs
– Supplemental & interim financial information
– Special reports
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– A Hostile “Token-Over?”
– Activism: Want a Settlement? It’ll Cost a Comp Committee Seat
– ICOs: A Dip in the Action?
– Cybersecurity: Will the SEC’s New Guidance Spur New Disclosures?
– Sustainability: Differentiator for Sell-Side Analysts’ Survival?
A friendly competition is brewing between our two “list-makers.” In the first edition of “The ‘Karla Bos’ Files,” Karla said she keeps of list of the 10 things (or more) that she accomplishes before 8:30 am every weekday. Inspired, Nina Flax decided to share her own morning rituals – so eventually we’ll be able to compare how two powerhouse individuals start their day. From Nina:
Here is one for the “Flax-Bos Throwdown of 2018.” Or maybe dance off. Though I don’t know if I’m “Team Britney” or “Team Justin.” Here are 10 things (not more) I accomplish before 8:30 a.m. every workday:
1. Wake Up. This is a MAJOR accomplishment for me. I am not a morning person, never have been. Would much prefer to stay up until 4 a.m. and sleep until 11 a.m. (but who am I kidding, I never get 7 hours of sleep anymore). Now there is child in my life. So, when he wakes up shouting “Papa, the sun is awake!” I too am awake. Even when I’ve been up past 2 a.m. working – or making lists…
2. Scan Email for Urgent Messages. I have taken to putting my phone in airplane mode at night, and leaving it not on the bedside table but on the floor (I think maybe this is helping my sleep?) – but I still scan my emails first. Being in California, I wake up to so many emails every morning from people further east and need to have the peace of mind that I have responded to everything urgent.
3. Kiss Child. Every morning – though sometimes by FaceTime. Funny aside on this. I have a very close friend who works at Facebook. My parents are very close to said very close friend, and when they come to visit me, they like to visit her on campus. I can’t take the time to describe the awesomeness of campus – but a particular focus of my father’s is their meatza (meat pizza). On one of my parents’ first visits to campus, my father said (out loud, he is not quiet and the area we were in was completely open plan): “You know, [friend]. You tell that Mark Zuckerberg that he missed the boat letting Apple get the name FaceTime.” I’m not kidding. It was hilarious.
4. Get Ready for Work. Usually while trying to continue to monitor emails and/or scanning LinkedIn for any interesting news updates. This usually includes cajoling child to brush his teeth. It is a real struggle.
5. Make Sure Creatures are Fed. Well, not all creatures. My husband always feeds the dogs (and in this I will not be upset when he uses the word always – this is different from arguments). But I usually make sure that child and fishy (or, I should say fishy 2.0) will get food – even if this is asking someone else to make sure it happens. That counts, right?
6. Drive to Work; Call Dad. (a) I don’t like to be on the phone at home, (b) somehow even though I live in Silicon Valley there are many dead spots in my house, and (c) I can’t (or at least I’m not supposed to) monitor emails while driving. So I always try to get the most out of my time in the car by making calls. The vast majority of the time one of my calls is to father mentioned above. We kibbitz and I sometimes try to explain how to accomplish various tasks on his iMac or iPad. Which is actually really hard without being able to look at your own screen to explain the way different icons and menus look. The rest of my calls are to colleagues to connect quickly on outstanding tasks, catch up on matters, etc.
7. Park Between the Lines. If you lived around here, you would know that many people do not accomplish this. I really don’t understand it. (My husband if he were talking to you would point out that I too, once, parked outside the lines – and got a ticket.)
8. Shout Hello to My Group. Anyone who sits by me in the office knows when I arrive. I am a big believer in hello’s & goodbye’s (and other things to connect – which I will save for another list).
9. Run to the Kitchen to Get Coffee. I am addicted to caffeine. I am okay with this.
10. Really Start to Work. When I lived in Chicago, trust me, this was a rarity before 8:30 a.m. I never subscribed to the Midwest way of earlier to work (but also was in the office later than most on a regular basis – see accomplishment #1 above).
Limits on Director Information Rights
We’ve blogged a couple of times – see this blog and this blog on DealLawyers.com – about the ongoing dispute between CBS & its controlling shareholder. If you like to “nerd out” on corporate law issues, this litigation just keeps on giving. Here’s the intro from this Francis Pileggi blog:
In the latest iteration of the ongoing litigation, the Delaware Court of Chancery recently provided a textbook summary of the general rule that directors have the right to unfettered access to corporate data, with three general exceptions. In this case, one of those exceptions to the general rule applied to prevent directors who were adverse to a Special Committee from obtaining communications with counsel for the Special Committee.
Lease Accounting: FASB Proposes Changes
It seems that FASB has noticed the sad state of implementation efforts for the new lease accounting standard. Earlier this week, they proposed a few changes aimed at easing the burden. The Exposure Draft addresses these topics:
1. Sales taxes & other similar taxes collected from lessees
2. Certain lessor costs paid directly by lessees
3. Recognition of variable payments for contracts with lease & non-lease components
Lots of interesting stuff in this Davis Polk survey of IPO governance trends among the Top 50 companies by deal size. There hasn’t been much change in the prevalence of defensive measures:
– 90% of companies adopted a classified board
– 94% of companies adopted a plurality vote standard for uncontested director elections
– 84% of companies effectively prohibited shareholder action by written consent
– 84% of companies had provisions prohibiting shareholders from calling a special meeting
– 78% of companies required a supermajority shareholder vote for amending the bylaws
– 90% of companies adopted exclusive forum provisions (up from only 14% in 2011)
When it comes to governance topics that aren’t necessarily enshrined in the articles & bylaws (and, interestingly, that many people agree shouldn’t receive “one-size-fits-all” treatment), more companies have been adopting “shareholder-friendly” practices:
– Average level of director independence was 73% of the board
– Over 80% of companies had fully independent audit, compensation & governance committees
– 52% of companies separated the role of chair & CEO (up from 34% in 2011)
– 38% of companies had an independent chair, and 33% of the remainder had a lead director
Of the 50 companies, 19 listed on the NYSE and 31 listed on Nasdaq. The survey also takes a separate look at practices among the Top 50 controlled companies.
Recently, Aon surveyed 223 institutional shareholders about their “responsible investing” initiatives (also see this Morgan Stanley survey). There’s been a dramatic upsurge of interest in this area – more than a quarter of the world’s professionally-managed assets now have a responsible investing mandate – and the 28-page report cites to a number of large studies that show a link between high ESG rankings & performance. Here’s some takeaways:
– Overwhelmingly, the most common type of responsible investing is incorporating ESG factors into investment decisions – as opposed to applying values-based screens to exclude or include investments (but note that when it comes to active investors, this Clermont Partners survey says that 47% apply a screen – and we’ve blogged about State Street and BlackRock initiatives).
– EU & UK investors are much more likely to have responsible investment policies in place, compared to US investors.
– Only about 35% of respondents (15% of US respondents) said that they use shareholder engagement/activism & proxy voting to express their responsible investment initiatives.
– Climate change is the top concern, followed by other environmental issues, bribery & corruption, weapons manufacturing and human rights.
– Lack of consensus on ESG factors, returns, materiality and definitions hinders progress.
The report also touches on retail investing – ESG assets have more than doubled since 2014. Strangely, this survey found that wealth advisors currently believe there’s low demand for “socially responsible investing” – but they expect growth over the next five years…
Impact Investing: Continued Growth
In this “Annual Impact Investing Survey,” the Global Impacting Investing Network looked at 229 “impact investors” – including fund managers, foundations, banks, family offices, and pension funds. Here’s a few interesting findings:
– 84% of respondents that make both impact and conventional investments noted that their organizations are making more impact investments and are demonstrating greater commitment to measuring and managing their impact. Just 6% of respondents indicated greater reluctance to making impact investments at their organizations.
– Over half of respondents target both social & environmental objectives. An additional 40% primarily target social objectives, and 6% primarily target environmental objectives.
– Most respondents reported using a mix of tools or systems to measure their social & environmental performance. Most commonly, respondents use proprietary metrics and/or frameworks that are not aligned to external methodologies (69%), qualitative information (66%), or metrics aligned with IRIS (59%). Further, two years after the ratification of the Sustainable Development Goals (SDGs) by the UN, three out of four investors report tracking their investment performance to the SDGs or plan to do so in the future.
We have posted the transcript for our recent popular webcast: “Insider Trading Policies & Rule 10b5-1 Plans.”
Getting a “Cyber-Savvy” Board
There was a time – not that long ago! – when data breaches were a rare event, nobody had heard of Cambridge Analytica and AI was mainly a sci-fi movie concept. There was also a time when having one director with “cyber” expertise was enough to signal a board’s commitment to understanding cyber threats & opportunities.
But somewhere along the way, people began to appreciate that boards can’t rely on one “digital director” to solve all of their cybersecurity and cyberstrategy needs – doing that is the corporate-governance equivalent of this overused meme. This Spencer Stuart blog explains how the scenario often plays out with “next-gen” directors who are recruited for their tech skills:
Just because someone has worked at Facebook doesn’t mean he or she knows how to guide a 100-year-old company through a transition to e-commerce. Likewise, someone with digital marketing experience may not know the first thing about cybersecurity.
Boards need to better assess their company’s needs and the candidate’s capabilities, and prospective directors need a better understanding of what board service entails. In addition, boards should know that “next-gen directors,” broadly speaking, are very disinterested in sitting on a board where they aren’t making an impact on real issues: strategy, technology roadmap, etc.
This EY memo elaborates on how directors can use their existing skill-sets to oversee cyber issues – with help from dashboards, crisis planning exercises, third-party experts and resources that identify regular questions for management. And check out this WSJ blog for a story about Avon’s new “digital board” – an advisory group consisting of internal & external members – which will report to the board and executive committee.
The Incredible Shrinking Stock Market?
It’s been a year since we’ve blogged about the dwindling number of public companies. The trend continues – and this study examines the consequences to the general public. It says that the problem isn’t just that there’s a shrinking pie and fewer choices for “Main Street” investors – it’s that society now has less visibility into the privately-held entities that generate jobs & profits.
But for a more positive view, this essay – “Rumours of the Death of the American Public Company are Greatly Exaggerated” – says that everything’s fine. As summarized in this Cooley blog, companies still either go public (eventually) or get acquired by public companies – and the aggregate market cap of the remaining behemoths is higher than ever. The author isn’t as concerned with retail investors “having less scope to capture the upside of fledgling companies.”
Every few years, we survey developments in whistleblower policies & procedures (we’ve conducted several surveys in this area). Here’s the results from our latest one:
1. Over the last year, when it comes to our whistleblower policy, our company:
– Has changed existing policies to address the latest whistleblower developments – 6%
– Hasn’t yet, but intends to change existing policies within the next year – 6%
– Not sure yet if will change existing policies – 53%
– Has decided not to change existing policies – 35%
2. The board committee charged with consideration of the SEC’s whistleblower rules is:
– Has provided incentives for whistleblowers to report internally first – 6%
– Hasn’t yet, but intends to provide incentives for whistleblowers to report internally first – 6%
– Has decided to not provide incentives for whistleblowers to report internally first – 88%
4. Our company:
– Has created a system to alert employees of the benefits of reporting internally (eg. sign updated employee handbook, fill out compliance questionnaires) – 31%
– Hasn’t yet, but intends to create a system to alert employees of the benefits of reporting internally – 6%
– Has decided not to create a system to alert employees of the benefits of reporting internally – 63%
5. Since the SEC adopted its whistleblower rules, our company has had:
– More whistleblower claims reported internally – 6%
– Same number of whistleblower claims reported internally – 94%
– Fewer whistleblower claims reported internally – 0%
Please take a moment to participate anonymously in these surveys:
This “Audit Analytics” blog takes a look at macro trends in 10-K, 10-Q and 8-K comment letters. The average number of days to resolve comments has dropped significantly over the last seven years – from 86 days in 2010 to only 44 days last year.
The total number of comment letters has also steadily declined during that time period. This decrease is due in part to the declining number of public companies – but it also results from Corp Fin’s more recent principles-based approach to comments and a big drop-off in Regulation G-related comments during the last year. Don’t get too carried away with non-GAAP, though – the number of 8-K comment letters on this subject is still well above the low-water mark.
A View on Professors as Expert Witnesses
In this podcast, Professor J.W. Verret discusses Veritas Financial Analytics – the only expert witness firm operated by professors – and more:
– What’s it like being a professor?
– What type of dealings do you have with Congress?
– Why should professors run an expert witness firm?
– How does Veritas Financial Analytics differ from other expert witness firms?
On Friday, Corp Fin posted this “Small Entity Compliance Guide” – which summarizes the recent amendments to the smaller reporting company thresholds & clarifies when newly-eligible companies can transition to scaled disclosure. For a summary, see this blog from Cooley’s Cydney Posner. Here are a few key points:
– Companies determine SRC status annually as of the last business day of their second fiscal quarter. If a company doesn’t qualify under the “public float” test, it would then determine whether it qualified based on annual revenues in its most recent fiscal year completed before the last business day of the second fiscal quarter.
– A company that’s newly qualified as an SRC can elect to use scaled disclosure beginning with the second quarter Form 10-Q. A company must reflect its SRC status in its Form 10-Q for the first fiscal quarter of the next year.
– For purposes of the first determination of SRC status after the September 10th effective date of the new rules, companies will qualify if they meet the revised definition as of the last business day of their most recently-completed second fiscal quarter. Companies can use scaled disclosure in their next current or periodic report due after September 10th (or filed on or after September 10th, in the case of transactional filings without a due date). The guidance has a handy chart that shows when companies with various fiscal year ends can transition.
More on “Who Administers Political Spending Policies?”
We’ve blogged a couple of times about political spending oversight – and the risk that candidates who have received company contributions might end up supporting positions that conflict with the company’s position. For an activist’s view on these risks – and recommended board policies & procedures – check out the Center for Political Accountability’s recently-issued 36-page report.
Recently, Climate Action 100+ – a coalition that includes 225 investors with $26 trillion in assets under management – announced that it’s adding 61 companies to its focus list, bringing the total to 161 companies worldwide. They’re selecting companies based on these criteria:
– Reported & modeled greenhouse emissions data (including emissions associated with the use of their products)
– Materiality to investor signatory portfolios
– Significance of their opportunities to drive the clean energy transition
Since December, 18% of focus companies officially support or have committed to implement recommendations from the ‘Task Force on Climate-related Financial Disclosures’ and 22% have set or committed to set a target for reducing their emissions beyond 2030.
We’re feeling pretty lucky around here. Karla Bos reached out to us after reading “The ‘Nina Flax’ Files” – to let us know that she too is a list-maker. Here’s Part I of Karla’s “list of lists” (let Karla know what you think – my personal favorite is #2):
I’ve always been a list-maker, thanks to my parents – family to-do lists for the weekend (equal parts work & play, as I recall, something I’m striving to return to) and lists of summer chores by the day (including the much-despised yardwork, yet ironically I now enjoy it, go figure). But I didn’t fully appreciate until I read Nina’s lists how much I enjoy and rely on lists myself and what they must reveal about me. So I was inspired to make my own “list of lists” – sans my multiple shopping lists – and to make my own versions of many of Nina’s excellent lists:
1. Why Making Lists Keeps Me Sane
2. Why I Look Forward To The Women’s 100 Every Year
3. Multiple To-Do Lists (each with a strategic physical location in addition to electronic reminders): Multi-Week Personal To Do List, Today’s Personal To-Do List, Today’s Business Success (Aka Must-Do) List, Upcoming Personal/Family Appointments
4. Things I Didn’t Realize Were So Hard for Companies When I Was on the Investor Side
5. Things Companies Don’t Understand About the Investors That Vote Their Proxies
6. Ways My Acting School Training Helps Me In Business Every Day
7. What I Learned From Living In a Small Town, a Big City, the Woods & the Desert
8. Things I Do For My Job That Add Value (But Aren’t Billable)
9. What Working From Home Has Taught Me
10. Ways That Companies Inadvertently Offend Their Investors
11. 10 Things (Or More) I Accomplish Before 8:30 am Every Workday
12. Activities I Do/Should Be Doing Every Day To Counteract Too Much Sitting At a Desk
NASAA Proposes “Blue Sky” Updates
NASAA has proposed two rules that would make overdue updates to the ancient “manual exemption” – which is available for secondary resales when companies make certain information publicly available. The proposed rules would encourage states to:
1. Replace “S&P’s Corporation Records” with the OTC website as an information source for the manual exemption and
2. Provide an exemption for companies that have conducted a “Tier 2” Regulation A offering and are current in their ongoing reporting requirements
Is it just me, or do these changes seem overdue? The SEC adopted the Reg A+ changes over 3 years ago – and S&P discontinued their records service in 2016. You’d have thought something would have come along sooner. Comments are due by August 20th. Hat-tip to Latham’s Paul Dudek for bringing this to our attention.
Reduced Rates End Next Week: Our “Pay Ratio & Proxy Disclosure Conference”
There’s been a lot of buzz this year about voluntary exempt solicitations – increasingly, these notices are being used to publicize shareholder views on proposals and other topics. Broc blogged about John Chevedden’s first “Notice of Exempt Solicitation” in March – and earlier this week I noted on our “Proxy Season Blog” that it may become a year-round practice. Yesterday, Corp Fin issued two new Proxy Rules CDIs that confirm that voluntary exempt solicitations are okay – if it’s clear who is making the filing.
– Question 126.06 says that the Staff will not object to a voluntary submission of such a notice, provided that the written soliciting material is submitted under the cover of Notice of Exempt Solicitation as described in CDI 126.07 and such cover notice clearly states that the notice is being provided on a voluntary basis. Doing so will make it clear to investors the nature of the submission and that it is being made on behalf of a soliciting party who does not beneficially own more than $5 million of the class of subject securities.
– Question 126.07 says that the Rule 14a-103 information required by Rule 14a-6(g)(1) – e.g. the filer’s name & address – must be presented in an Edgar submission before the written soliciting materials, including any logo or other graphics used by the soliciting party. To the extent that the notice itself is being used as a means of solicitation, the failure to present the Rule 14a-103 information in this manner may, depending upon the particular facts and circumstances, be misleading within the meaning of Exchange Act Rule 14a-9. This requirement applies regardless of whether the filing is voluntary or to satisfy the requirements of Rule 14a-6(g)(1).
For more background & commentary, visit this Gibson Dunn blog. Here’s an excerpt:
While these new CDIs provide helpful guidance on the use of voluntary Notices of Exempt Solicitations, the CDIs may not go far enough to address potential abuses that increasingly are arising when the EDGAR system is used as a platform for disseminating a filer’s views. For example, C&DI Question 126.06 does not expressly require that the filer represent that it is in fact a shareholder.
Absent further guidance from or review and comment on such filings by the Staff, the process allows anyone with EDGAR codes to submit filings unrelated (or only tangentially related) to a proposal, or to set forth disparaging or inflammatory views, subject only to the Rule 14a-9 standard governing false and misleading statements. For example, John Chevedden, who as of July 31 has filed 21 of these filings in 2018, filed a Notice of Exempt Solicitation at Netflix a week after the company’s annual meeting, which contained only a vague and confusing voting recommendation at the very end, and instead was devoted largely to criticizing the company’s decision to hold a virtual annual meeting. However, the Staff has informally indicated that companies should contact them if they believe the PX14A6G process is being abused, and the new interpretations hopefully indicate that the Staff will be more proactive in reviewing and possibly commenting on such filings.
“Passive” Investors: Causing a Rise in Activism?
We’ve blogged a few times about the misnomer of “passive” investors. But whatever we call them, the capital flow to these firms continues to increase. And this “Rivel Research” study indicates that these firms are exercising more & more influence – particularly when it comes to engagement on corporate governance & executive pay. Some active managers aren’t happy about that, because they think their passive counterparts make uninformed decisions that adversely impact stocks that the active funds are mandated to hold.
So what’s an active manager to do? Maybe they write a 17-page client letter to say they’re still better at picking stocks, as described in this WSJ article. Maybe they call them communists. Or maybe, they move away from simply picking stocks and into the potentially more lucrative field of campaigning for stock-enhancing changes – which could also minimize the impact of the passive engagement that they find problematic. This WSJ article credits passive investing with the hot activist environment and increasing involvement of first-time activists.
For tips on communicating with “passive” investors (and active investors that bifurcate the engagement & voting teams), check out this article from Ron Schneider of Donnelley Financial Solutions. He points out that they’re more likely to rely on the proxy statement than IR blasts – so there’s an increasing benefit in providing voluntary proxy disclosure on things like strategy & ESG issues. And as Broc has blogged – it’s best to do this in a thoroughly-bookmarked online document.
Our August Eminders is Posted!
We’ve posted the August issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Yesterday, the SEC announced that it will hold a “proxy process” roundtable this fall. The date & agenda are TBD – but Chair Clayton is asking Corp Fin to reconsider the voting process, retail shareholder participation, shareholder proposals, proxy advisors, technology & universal proxy cards.
This isn’t the first time the SEC has tackled “proxy plumbing.” It issued its first concept release on this topic back in 2010 (see our “Proxy Plumbing” Practice Area). That effort didn’t result in much rule-making – maybe the SEC’s initiatives will be less controversial this time.
ISS Policy Survey: Auditor & Director Track Records, Gender Diversity & More
Yesterday, ISS opened its “Annual Policy Survey” – like last year, it consists of two parts:
1. Governance Principles Survey – 10 questions on high-profile topics. This year’s questions relate to auditor independence & quality, audit committee evaluations, impact of past & present director track records at other companies, board gender diversity and the “one-share, one-vote” principle. This part of the survey will close on August 24th.
2. Policy Application Survey – More expansive portion that can be accessed at the end of the initial survey, allowing respondents to drill down on key issues by region. This part of the survey closes September 21st. According to this Weil blog, the key issues for the Americas region include excessive non-executive director compensation, independent chair proposals, share ownership requirements for binding bylaw amendments and pay-for-performance metrics.
As always, this is the first step for ISS as it formulates its 2019 voting policies. In addition to the two-part survey, ISS will gather input via regionally-based, topic-specific roundtables & calls and a comment period on the final proposed changes to the policies.
Company Prevails Over Disputed Advance Notice Bylaw
A recent advance notice bylaw dispute is a reminder that there’s usually room for interpretation. Check out the intro from Ning Chiu’s blog:
HomeStreet received a 133-page notice the day before the advance notice deadline in its bylaws, alerting the company that Blue Lion intended to nominate two directors and submit two proposals – seeking annual elections and a binding resolution for an independent chairman.
Less than a week later, the company announced that the notice was deficient – attaching a five-page letter to a Form 8-K that it sent to the shareholder. The letter stated that the notice provided by the shareholder failed to meet several of the bylaw’s disclosure requirements, including providing information related to the holder of shares that would be disclosed in a proxy statement governing a solicitation as well as deficiencies in the D&O questionnaires returned by the shareholders’ nominees. Since the deadline had passed, declared the company, the company intended to disregard the nominations and the proposals for the meeting.
As you might guess – Blue Lion didn’t just accept this and walk away. In their view, the notice materially complied with the bylaw. They responded in a 34-page letter – and they took it to court. In this instance, the company prevailed.
According to this Sidley blog, since HomeStreet’s bylaw had been in place since the company’s IPO & was previously-disclosed, the court found that the company hadn’t taken any defensive measures. So, it rejected the argument that Delaware’s “enhanced scrutiny” test should apply. Broc recently blogged about a New York case with a different outcome…
