Here’s a scary stat from a Bain CFO survey that I shared last week on the Proxy Season Blog:
There are now about 1,000 activist campaigns per year, and 25% of CFOs expect their company to be a target in the next 2 years.
This Skadden memo says that lengthy director tenures are an increasingly important factor in activists’ decisions to target a company – and they aren’t doing companies any favors when a contested election goes to a vote, either. Here are the key takeaways:
– Proxy advisory firms and institutional investors increasingly view tenures over nine years as too long, questioning the independence of directors who have served longer than that.
– Board refreshment is a frequent demand of activists, so companies may find themselves vulnerable to activist campaigns if they have very long-serving directors.
– As boards review their own composition for skills and other attributes, they should explain to investors the value that long-serving directors bring to the board.
– While few U.S. companies have formal tenure limits, age limits are more common but less favored by proxy advisory firms.
The memo says that 67% of activist campaigns since 2021 have targeted companies with three or more directors who have served 10 years or more, according to Evercore’s Third Quarter 2024 Quarterly Review. As that last point above alludes to, recent survey results indicate that mandatory retirement is still a widely used tool for board refreshment – but companies are also amping up their evaluation practices.
The National Association of Manufacturers has filed its brief to appeal a February decision from the D.C. Federal District Court that would vacate the SEC’s 2020 rule to regulate proxy advisors. The rule was premised on the notion that proxy advisor services are a “solicitation” under Rule 14a-1 – and are exempt from information & filing requirements only if they comply with certain conditions, including giving companies an opportunity to review & respond to voting recommendations.
This blog from Cooley’s Cydney Posner reports details from NAM’s brief. Here’s an excerpt:
NAM professed that, in its statutory analysis, the district court made “three fatal errors.” First, NAM claimed, the district court failed to take into account “Congress’s express delegation of authority to the SEC to define statutory terms like ‘solicit.’” Citing Loper Bright (see this PubCo post), NAM contended, “when Congress expressly gives an agency definitional authority, the court must ‘independently identify and respect such delegations of authority, police the outer statutory boundaries of those delegations, and ensure that agencies exercise their discretion consistent with the APA.’”
In adopting its definition of “solicit”—a definition that “falls within the word’s acknowledged range of meanings”—the SEC was acting pursuant to Congress’s delegation, NAM asserted. As a result, NAM argued, the district court “should have ‘respect[ed]’ Congress’s explicit delegation, not overridden it in favor of a narrower interpretation.” This case, NAM argued, “presents a question of statutory construction: whether the SEC’s definitional amendment regarding ‘solicit‘ is consistent with the Exchange Act. That is the Court’s domain, not the SEC’s.”
Second, NAM looked to the “ordinary tools of statutory interpretation” to find a broad meaning for the term “solicit”: according to NAM, this broad scope is supported by contemporaneous authorities, the structure of Section 14(a), the “historical circumstances and remedial purpose of the Exchange Act,” and the “near-century worth of enforcement.”
Third, NAM contended that “the district court rewrote the statute by concluding that the SEC may only regulate proxy solicitors who have an interest in the underlying corporate ballot measure. The Exchange Act contains no such requirement.” Nothing about the term “solicit,” NAM argued, necessarily implies that the solicitor has an underlying interest in the matter submitted for a vote. “If a person asks a shareholder for their proxy—soliciting it in the most literal sense—and then votes based on a coinflip, that person would surely be subject to SEC regulation, despite lacking an interest in the measure’s outcome.
The district court’s conclusion to the contrary yields disastrous and absurd results. The Court should reverse.”
It’s not clear where we’ll go from here with this case and with proxy advisor regulation in general. The 2020 rule was adopted when Jay Clayton chaired the SEC – it was welcomed by companies and resulted from years of advocacy. Unsurprisingly, ISS promptly challenged the rule (and guidance that had preceded it), but the litigation has inched along and been confusing to follow, in part because the SEC partially repealed the rules in 2022. The rollback generated its own wave of lawsuits in the 5th Circuit – with the most recent decision on that front being that the SEC’s 2022 repeal was arbitrary & capricious and the 2020 rule should stay in place. So, that 5th Circuit decision was somewhat at odds with the one that NAM is challenging here, from the D.C. District Court.
Cydney notes that for this case, ISS’s brief is due in mid-January. The SEC had been aligned with NAM in this litigation, but it dropped out of the appeal last spring. This Bloomberg Law article says that the U.S. Chamber of Commerce has filed an amicus brief in support of NAM’s positions.
In their latest “Understanding Activism with John & J.T.” podcast, John and J.T. Ho were joined by Sean Donahue. Sean is Chair of the Public Company Advisory practice and Co-Chair of the Shareholder Activism & Takeover Defense practice at Paul Hastings, and his practice focuses on counseling public companies and their boards of directors on shareholder activism and takeover defense, mergers and acquisitions, capital markets transactions, securities regulation, and corporate governance matters.
Topics covered during this 35-minute podcast include:
How exempt solicitations differ from conventional proxy solicitations
Common exempt solicitation scenarios and when and how companies should respond
Will the trend toward use of exempt solicitations by pro- and anti-ESG proponents continue?
The goals of a typical “vote no” campaign and how these campaigns typically unfold
Impact of majority voting standards on the effectiveness of vote no campaigns
Defense strategies for vote no campaigns and how they differ from those used in a traditional proxy contest
What “zero slate” campaigns are and how they work
Potential advantages and disadvantages of a zero slate campaign for an activist
How companies should adjust defense strategies to address the threat of of a zero slate campaign
Are zero vote campaigns activism’s next big trend?
John and J.T.’s objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. They’re continuing to record new podcasts, which are filled with practical and engaging insights. I’ve really been enjoying them. Stay tuned for more!
We’re back from the holiday weekend and somehow heading into the final month of 2024. I don’t know about you, but I’ve come down with a case of the Mondays. So, it seems fitting to cover a topic that can sour even the best of days: delistings. The good news is, we’ve also got some tips for righting the ship.
This Honigman memo reports that more companies have been receiving notices of noncompliance with the Nasdaq Capital Market’s minimum stockholders’ equity requirement as the exchange reviews listed companies’ latest quarterly filings. Here’s an excerpt:
Nasdaq evaluates companies’ stockholders’ equity for purposes of compliance with the equity standard on a quarterly basis by reviewing the balance sheet data included in a company’s most recently filed Annual Report on Form 10-K or Quarterly Report on Form 10-Q. If the disclosed amount of stockholders’ equity is less than $2.5 million and the company also fails to meet the Nasdaq Listing Rule 5550(b)’s market value standard and net income standard, then Nasdaq will deliver a notice of deficiency to the company. Typically, such notice of deficiency is delivered within one business day to one calendar week following the company’s most recent Form 10-K or Form 10-Q filing. After receiving the notice of deficiency, the company has four business days to file a Current Report on Form 8-K announcing the receipt of the notice (as required both by Nasdaq rules, and Item 3.01 of Form 8-K). The Form 8-K deadline is based on the date that Nasdaq’s notice is delivered, and not on the date of filing of the Form 10-K or Form 10-Q.
With respect to the deficiency itself, the company has 45 calendar days from the date the notice is delivered from Nasdaq to provide to Nasdaq a compliance plan with the $2.5 million stockholders’ equity threshold. Acceptance of the plan is at Nasdaq’s discretion.
If the company’s plan is accepted, Nasdaq will grant the company an extension of up to 180 calendar days from the date the Company received the notice of deficiency. However, if the company does not regain compliance within the allotted timeframe, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that company’s securities listed on Nasdaq will be subject to delisting. The company would then be entitled to request review of that determination by a Nasdaq hearings panel.
The memo explains that while the stockholders’ equity standard is only one of three alternatives for complying with Rule 5550(b), pre-revenue and newly commercialized life sciences companies have had a harder time relying on the market value standard as of late, and the net income standard is typically also unavailable. So, the stockholders’ equity standard has become more important.
The memo goes on to provide a template for a successful compliance plan. Make sure to check that out, along with the other resources in our “Delistings” Practice Area.
Now that we’ve gotten the scary prospect of delisting out of the way, let’s turn to what you need to do to get (and stay) in compliance with the governance standards of your exchange.
One of my “go to” resources for quickly referencing independence and other requirements applicable to public company directors has long been Weil’s chart on those requirements. I was pleased to learn that the firm recently issued an updated version of that chart, which we’ve posted in our “IPOs” Practice Area. Check it out – it covers NYSE & Nasdaq listing standards for boards and committees, as well as SEC disclosure requirements relating to directors.
As you prepare your governance calendar for the upcoming year, this 7-page Sullivan & Cromwell memo can help you consider topics that may get airtime in the boardroom in 2025. The memo is organized into separate sections for the board and each of the key committees. Keep in mind that “who does what” can vary from company to company, so always remember to check your own charters.
Here are 6 topics that S&C predicts many companies will be covering at the full-board level – see the memo for more color on each of these:
1. Addressing the use of artificial intelligence
2. Overseeing management succession planning
3. Monitoring the company’s compliance culture
4. Improving committee coordination
5. Monitoring the business impact of emerging trends (political, regulatory, economic, and social)
6. Reviewing cyber incident response plans and disclosures
On Monday, FASB announced that it had published an Accounting Standards Update that will require publicly traded companies to provide more detail about expenses that are reflected on their income statement. Specifically, ASU 2024-03, Disaggregation of Income Expenses (DISE), will require companies to:
1. Disclose the amounts of (a) purchases of inventory; (b) employee compensation; (c) depreciation; (d) intangible asset amortization; and (e) depreciation, depletion, and amortization recognized as part of oil- and gas-producing activities (or other amounts of depletion expense) included in each relevant expense caption.
2. Include certain amounts that are already required to be disclosed under current generally accepted accounting principles (GAAP) in the same disclosure as the other disaggregation requirements.
3. Disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively.
4. Disclose the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses.
Investors have been calling for this update for several years. I’ve blogged about the “employee compensation” aspect a few times on CompensationStandards.com. This PwC memo explains what the new ASU will require and provides helpful FAQs. Here’s an excerpt that clarifies where the new disclosures will appear:
The new standard does not change the presentation of expense information or expense captions reported on the face of the income statement. Rather, the new standard requires disclosures in the footnotes that provide disaggregated information about an entity’s expense captions that are presented on the face of the income statement within continuing operations.
The new ASU is effective for annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027.
In the latest “Understanding Activism with John & J.T.” podcast, John and Orrick’s J.T. Ho were joined by Elizabeth Gonzalez-Sussman, head of Skadden’s shareholder engagement and activism practice. Prior to joining Skadden, Elizabeth was a partner at Olshan Frome, where she advised hedge funds and large investors on the strategy and execution involved in all types of shareholder activism-related activities.
Topics covered during this 33-minute podcast include:
– The reasons why companies have fared better in proxy fights in recent years
– The current environment for activist settlements and tips for companies considering a settlement
– Activism in multi-class companies
– The decline in “bed bug” letters and when it still makes sense to send them
– Elizabeth’s lessons for corporate clients from her experience in advising activists
– Implications of recent Delaware case law and statutory changes for settlement terms
– Dealing with multiple activists
– Evolution of activist strategies and lawyers’ roles over the next few years
This podcast series is intended to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. John & J.T. continue to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!
Programming note: In observance of Veterans Day, we will not be publishing blogs on Monday. Thank you to all who have served or have family members who have served.
Earlier this week, the SEC’s Office of Inspector General released its annual report on the agency’s top management and performance challenges. This year’s report is 20 pages – compared to last year’s 34-page review. This reflects the OIG’s cycle of preparing a detailed examination in one year and following up with a shorter summary the following year.
In the OIG’s view, the current (anti-)regulatory environment is one of the biggest risks the SEC currently faces. The report lists several rules that were recently vacated or stayed, and observes:
The current regulatory environment may lead to increased forum shopping by petitioners and extended periods of uncertainty about the permissible scope of agency action.
With heightened judicial scrutiny, agencies, including the SEC, must continue to develop a thorough administrative record, including meaningful opportunity for public participation and reasoned responses to public submissions. The SEC already invests considerable resources toward these ends, but should be prepared for additional litigation, as industry and public interest groups may take opportunities to challenge regulations.
The OIG also notes:
The SEC should anticipate increased litigation by parties challenging current and future rulemakings and ensure that new regulations will withstand judicial scrutiny.
Over the past year or two, the SEC has been signaling that it understands these risks, by taking extra time to consider comments and building out the cost-benefit analysis in its adopting releases. But the OIG is doing more: it’s auditing the rulemaking process and internal controls, focusing on:
– The opportunity for interested persons to participate in rulemaking;
– Assessing and documenting the impact of proposed rules on competition, efficiency and capital formation; and
– Ensuring that staff with appropriate skills and experience are involved in formulating and reviewing proposed rules.
It expects to complete a report on this in 2025. That said, in light of this week’s election results, there’s a chance that in the near future, the SEC won’t care so much about adopting and defending new rules (at least, the ones that arguably make being a public company more difficult). John will be blogging in the coming week about what other developments might be in store at the SEC next year…
This year’s report from the SEC’s Office of Inspector General also acknowledges the Supreme Court’s decision this year in SEC v. Jarkesy – which prevents the SEC from using administrative proceedings in contested securities fraud actions for civil penalties. The report says this has created uncertainty on the enforcement front:
The decision may have broader implications for the SEC’s enforcement program, as open questions remain, such as the constitutionality of seeking civil penalties in other types of administrative proceedings It is difficult to predict whether the availability of a federal jury trial will make defendants more likely or less likely to resolve claims in advance of litigation The uncertainty surrounding the SEC’s ability to adjudicate other enforcement actions administratively, as well as the additional resources required to bring actions in federal court, pose challenges for the SEC.
Related to this, but not mentioned in the report, is the fact that the SEC has been dismissing misconduct proceedings against accountants that were pending before administrative law judges. I blogged about that a couple months ago – here’s a LinkedIn post about the impact that the proceedings had on one accountant’s career.
