Sometimes it isn’t clear why investor votes come down on one side versus the other. Last week, in an effort to give more insight into those decisions, Vanguard released a 12-page report about key votes cast during the 2023 calendar year. The report covers both management and shareholder proposals (including director elections) and is broken down by region. The report is worth reviewing if Vanguard is a significant holder at your company and you are uncertain of how they will vote on this year’s proposals. Specifically, the report highlights “significant votes” as defined in the EU’s Shareholder Rights Directive, which means they:
(i) involved a vote at a company in which Vanguard-advised funds hold a meaningful ownership position, or (ii) conveyed Vanguard Investment Stewardship’s perspective on an important governance topic that arose in connection with a shareholder vote.
The “Key Votes Report” follows the publication of Vanguard’s Investment Stewardship Report, which was released earlier this month and includes high-level stats for the asset manager’s voting record on various management and shareholder proposal topics (see pg. 56) – as well as case studies and general takeaways. In this report, Vanguard noted that U.S. boards are responding to “universal proxy” with enhanced disclosure of director skillsets and effectiveness. Here’s an excerpt:
We saw many companies implement practices and enhance disclosure related to their board skills matrices, director capacity and commitment policies, and board effectiveness assessments. We shared with companies our perspective that these changes and their related disclosures give shareholders greater visibility into board operations and a better understanding of how boards fulfill their oversight role.
Across the Americas, independence was a primary factor in instances where the funds did not support a director’s election. When we observe a lack of sufficient board independence and/or have concerns related to key committee independence, the funds may not support the election of certain directors.
In addition, in the U.S. and Canada, the funds did not support compensation committee members in instances where issuers had not appropriately responded to significant concerns with executive compensation expressed through the prior year’s Say on Pay vote.
If you are amending bylaws this year, make sure to catch this nugget as well:
We observed that many U.S. companies, in response to legal and regulatory changes, unilaterally amended company bylaw provisions to limit executives’ liability, require specific jurisdictions for litigation, and/or adopt advance notice provisions impacting shareholders’ ability to bring proposals and director nominations to votes at company meetings of shareholders.
In these cases, we reviewed the impact these changes had on shareholder rights and engaged with companies to understand their rationale for adopting the provisions. In instances where we determined that the provisions were unduly onerous and/or otherwise alienated shareholder rights, the funds voted against relevant members of the board’s governance committee to express concern.
The Investment Stewardship report also notes that the team regularly attended industry events to promote corporate governance practices and share their perspectives. I know that everyone on the corporate side appreciates being able to gain insight & understanding from John and other members of Vanguard’s Investment Stewardship team at these events. I was happy to see that the report recognized those efforts!
Check out John’s latest “Timely Takes” Podcast featuring Orrick’s J.T. Ho & his monthly update on securities & governance developments. This one is a good complement to today’s webcast! In this installment, J.T. reviews:
4. Staff guidance on “sell to cover” Rule 10b5-1 plans
5. New SEC rules on projections
As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email John and/or Meredith at john@thecorporatecounsel.net or mervine@ccrcorp.com.
Last week, the U.S. Court of Appeals for the Fifth Circuit issued an opinion that upheld the SEC’s use of a “gag order” in a civil consent decree. If this case – and the outcome – sound familiar, that’s because it is.
The decision – SEC vs. Novinger – follows a series of challenges by a defendant who sought to reopen a 2016 settlement with the SEC. He’s represented by the same organization that has petitioned the SEC to end this policy – and the latest opinion highlights that he was “disheartened but not dissuaded” by a similar ruling on his case two years ago, which John blogged about at the time. After bringing another motion at the district court level that raised the same claims as the one that was previously denied, the Court of Appeals once again had to weigh in.
In this instance, as in 2022, procedural defects prevented the court from examining the merits of the SEC’s “neither admit nor deny” policy. While the procedural mechanics are enough to make a corporate lawyer’s head spin, the bottom line was that the defendant didn’t bring the right type of motion (which would have been a “Rule 60(b) motion”), so the Appeals Court found that it did not have jurisdiction. And while you might think that leaves the door open to yet another challenge, the panel of judges seemed to shoot down that notion:
Novinger claims first that, after the Rule 60(b) motion failed in Novinger I, he had no other way to challenge the “gag order.” Specifically, he explains that he cannot bring a separate action nor violate the consent decree because of, respectively, the collateral-attack and collateral-bar rules. Assuming, arguendo, that Novinger is correct that no other avenues exist by which to obtain relief, that makes no difference. As the SEC points out, Novinger can, and did, seek relief under Rule 60(b). That he failed does not entitle him to some other form of relief.
So, despite the Fifth Circuit’s recent reputation as “The Place Where SEC Rules Go to Die,” the Enforcement Division’s policy lives to see another day, and if you are working on any settlements, it is something you will need to factor into your decisions. The policy continues to have plenty of critics, and the NCLA is relentless, so this is probably not the end of the story.
Here’s something that John blogged yesterday on DealLawyers.com:
Last month, Vice Chancellor Laster refused to dismiss claims challenging a controlled corporation’s decision to move its jurisdiction of incorporation from Delaware to Nevada. In reaching that decision, the Vice Chancellor concluded that because the reincorporation would reduce the litigation rights of stockholders, it involved a non-ratable benefit to the controller & the decision should be evaluated under the entire fairness standard.
On Thursday of last week, Vice Chancellor issued a subsequent decision in the case denying the defendants’ application for an interlocutory appeal of the decision. In doing so, he clarified that a controlled corporation’s decision to move from Delaware won’t invariably be subject to entire fairness review:
The defendants also seek to bolster their argument for interlocutory appeal by asserting that the Opinion “precludes any allegedly controlled company from leaving the State without satisfying entire fairness review . . . .” The defendants reach that conclusion by observing that to satisfy the MFW standard, a controlled company must form a special committee of disinterested directors. The defendants argue that “under the Court’s reasoning, it is unclear when, if ever, there would be directors who are disinterested in a decision to move to a jurisdiction that provides greater litigation protection to those directors.”
The taint of alleged self-interest that the Opinion credited resulted from the inferably material reduction in litigation exposure that a fiduciary who otherwise would continue to serve under a Delaware regime could achieve by moving to a Nevada regime. The equation has two variables: (i) serving as a corporate fiduciary under Nevada law in lieu of (ii) otherwise serving as a corporate fiduciary under Delaware law. To remove the taint, remove one variable.
Vice Chancellor Laster then went on to illustrate how the company could address either of these variables. First, the transaction could be approved by a committee of directors who had submitted resignations that would become effective upon reincorporation in Nevada. Since those directors would not benefit from the enhanced protection Nevada provided, they wouldn’t be interested in the transaction.
Alternatively, the Vice Chancellor the board could add new directors who would serve as a committee to consider the reincorporation proposal, and who would submit resignations that would become effective if the reincorporation was not approved. These directors would also recuse themselves from any other matters acted upon by the board, thus eliminating their exposure to liability for those decisions.
The Vice Chancellor concluded that the new directors wouldn’t have served meaningfully as fiduciaries of the Delaware entity (other than with respect to the reincorporation), and that “it would be hard for a plaintiff to argue that the new directors were gaining any relative benefit from moving to the new jurisdiction, because the new directors would never face the prospect of continuing to serve unless the corporation moved to the new jurisdiction.”
Join us tomorrow at 2 p.m. Eastern for our webcast on “The SEC’s Climate Disclosure Rules: Preparing for the New Regime” – to hear Orrick’s J.T. Ho, Goodwin’s and TheCorporateCounsel.net’s Dave Lynn, Chevron’s Rose Pierson, and Persefoni’s Kristina Wyatt cut through the morass of information on the new rules. They’ll explain what you need to know about the new disclosure requirements – and they’ll share practical advice on building the controls & infrastructure to comply with them.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE which require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
Earlier this month, SEC Enforcement continued its series of “related party transaction” cases, by announcing a settlement with a footwear & fashion company that defined my ’90s style. Here’s an excerpt:
According to the SEC’s order, from 2019 through 2022, Skechers did not comply with related person transaction disclosure requirements when it failed to disclose its employment of two relatives of its executives and did not disclose a consulting relationship involving a person who shared a household with one of its executives. Furthermore, according to the SEC’s order, for multiple years, Skechers failed to disclose that two of its executives owed more than $120,000 to the company for personal expenses that had been paid for by Skechers but not yet reimbursed by the executives.
The alleged violations resulted from omitting RPT disclosure from proxy statements, which were incorporated into the company’s reports on Form 10-K. The difficulty with RPT disclosures is that not only do you need to accurately describe the relationships you know about, but you also need to put controls in place to learn about the relationships in the first place. Sometimes it can come as a surprise to directors and officers that the compensation arrangements of their gainfully employed relatives must be disclosed. The disclosure consequences of expense reimbursement timing also may not be front-of-mind.
Reading between the lines of this 5-page order, which notes the company’s cooperation and remedial policies & procedures (including training), and the relatively light $1.25 million penalty, these items may have fallen between the cracks despite overall good policies and no other skeletons in the closet. The company agreed to the order and penalty without admitting or denying the findings.
Not every company is so “lucky” when Enforcement comes knocking. As you finalize your proxy statement, this case gives you the opportunity to revisit any nagging doubts about your RPT disclosures. You can get practical pointers about how to go about doing that from the transcript of our December webcast, “Related Party Transactions: Refresher & Lessons Learned from Enforcement Focus.”
Here’s something that my colleague Zach blogged today over on PracticalESG.com:
Wow – things are moving fast with the SEC’s Climate-related Disclosure Rules. Despite being less than a month old and not even effective, they are already being litigated by a variety of plaintiffs. That litigation has already jumped through several procedural hoops. First, the Fifth Circuit Court of Appeals stayed the Rule, then the SEC moved to consolidate the cases, landing the consolidated litigation in the Eighth Circuit. Now, the Fifth Circuit has lifted their stay as a procedural matter. A recent Cooley blog states:
“Today, the Fifth Circuit ordered the transfer of the petition to the Eighth Circuit and the dissolution of the administrative stay. It’s worth noting that one of the three judges, Judge Jones, indicated her belief that the docket should stay as is pending transfer. Whether the stay will be reinstituted by the Eighth Circuit remains to be seen.”
It is worth noting that lifting the stay was not an action of the Eighth Circuit Court of Appeals but of the Fifth Circuit in transferring the case, essentially giving the Eighth Circuit a blank slate to work from. This means that the stay could very well be reimplemented by the Eighth circuit once proceedings ramp up. Normally we would expect that to take some time, but litigation of this rule seems to have warp engines.
In this 17-minute episode of the “Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed former SEC Acting Chair and Commissioner Allison Herren Lee, who is now Of Counsel at Kohn, Kohn & Colapinto and a Senior Research Fellow at NYU Law. We discussed:
1. Allison’s career path – including what drew her to becoming a securities lawyer and what she’s doing now.
2. Surprises that Allison experienced when she transitioned from being an SEC Staffer to being a Commissioner.
3. Allison’s proudest moment as a Commissioner.
4. Allison’s thoughts on how the Commission can balance the goals of investor protection and consistent disclosure with the risk of pushing capital formation to private markets.
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 “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
Yesterday, the Council of Institutional Investors sent this letter to the SEC to request that the Commission initiate rulemaking to require a technological solution to the issue of “traceability.”
The rulemaking petition says that the 2023 decision in Slack Technologies, LLC v. Pirani has jeopardized investor protection. In the Slack case, the SCOTUS held that an investor plaintiff who is seeking a remedy under Section 11 of the Securities Act must prove that the shares that they hold are traceable to a registration statement. That is particularly difficult to do in the direct listing context because unregistered shares enter the market and begin trading alongside registered shares. If there are lockup waivers, traceability may also be an issue in a traditional IPO.
The letter acknowledges that a working group has already urged rulemaking to amend Rule 144 to address this issue (which CII also supported, but it hasn’t gone anywhere). CII says that alternatively, the Commission should consider a technological solution. Here’s an excerpt:
Two potential approaches have been recently identified by former SEC Chair Jay Clayton and former Commissioner Joseph A. Grundfest. In a brief filed as amici curiae in the Slack case they stated that the Commission could:
1. Require that registered and exempt shares offered in a direct listing trade with differentiated tickers, at least until expiration of the relevant Section 11 statute of limitations; or
2. Migrate the entire clearance and settlement system to a distributed ledger system or to
other mechanisms to allow the tracing of individual shares as individual shares, and not as fractional interests in larger commingled electronic book entry accounts.
We note that the second more ambitious approach is aligned with the recommendation CII submitted to the SEC in connection with its 2018 Roundtable on the Proxy Process.
The letter also notes a third alternative that was the subject of a recent study from Columbia Law Professor & Director of the Center on Corporate Governance John Coffee and his colleague Joshua Mitts: adapting the detailed trading records that broker-dealers already maintain as part of the consolidated audit trail – and requiring production of these records to private plaintiffs in Section 11 litigation.
I don’t know enough about broker-dealer record-keeping requirements to gauge whether this would be as minimal a lift as the cited study makes it out to be. I do know that broker-dealers generally aren’t clamoring for more recordkeeping requirements….
It’s a busy week for the Commissioners next week. On Thursday, March 7th, there will be a meeting of the SEC’s Investor Advisory Committee meeting, which was the subject of a Sunshine Notice because a majority of the Commissioners may attend. Here’s what’s on the agenda:
1. Panel: Discussing the U.S. Securities and Exchange Commission’s Proposals to Improve Equity Market Structure (this includes “payment for order flow”)
2. Panel: Examining the use of Materiality as a Disclosure Standard — Can the Definition be Improved to Better Serve Investors? (Dave’s panel for the SEC Historical Society could be a good “pre-read” for this one)
