BlackRock Investment Stewardship has unveiled its Global Principles and U.S. Proxy Voting Guidelines for 2024 annual meetings. The 21-page Principles give a comprehensive view of BIS’s stance on 7 key themes that impact companies worldwide – ranging from board responsibilities, to shareholder protections, to sustainability.
The Voting Guidelines get more specific on how BlackRock’s perspectives on these themes apply to specific ballot items & topics in different markets. Overall, the U.S. Voting Guidelines didn’t change too much. While BlackRock seems to have backed off some of its more controversial positions, it still encourages disclosure and strong governance practices. Here are a few updates worth noting:
● CEO & Management Succession Planning – The guidelines now say that where there is significant concern regarding the board’s succession planning efforts, BlackRock may vote against members of the responsible committee, or the most relevant director. (See Meredith’s blog from earlier this month about trends in “succession planning” disclosure…)
● Committee Leadership – Where boards have adopted corporate governance guidelines about committee leadership and/or membership rotation, BIS appreciates clear disclosure of those policies.
● ISSB Standards – Recognizing that the TCFD framework has been absorbed by the International Sustainability Standards Board (ISSB) standards, BIS encourages disclosures on governance, strategy, risk management, and metrics & targets that are aligned with IFRS S1 and S2. BIS understands that companies may phase in ISSB reporting over several years and that some companies use different reporting standards.
● Climate Disclosures – BlackRock continues to seek to understand companies’ strategies for managing material climate risks & opportunities under various scenarios. BIS emphasizes that it is not dictating strategy, which is the role of the board & management, and that it can be challenging for companies to predict the impact of climate issues on their business. But it notes that this is a structural shift in the global economy that may affect regulations, technology & consumer preferences, which be material for many companies.
● Key Stakeholders and HCM – While BlackRock continues to encourage disclosure on DEI approaches, workforce demographics, and natural capital issues, it no longer indicates that it will vote against directors if it determines that a company is not appropriately considering their key stakeholders or if a company’s disclosures or practices fall short relative to market peers on human capital management.
● Shareholder Proposals – A new section says that when assessing shareholder proposals, BIS evaluates each proposal based on merit and long-term financial value creation. BIS does not support proposals that it believes would result in over-reaching into the basic business decisions of the company. In addition, BIS believes it’s helpful for companies to disclose the names of the proponent or organization that has submitted or advised on the proposal. BIS may support shareholder proposals when they are focused on a material business risk that the company has not adequately addressed, if the proposal is reasonable and not unduly prescriptive.
● Responsiveness – Alternatively, or in addition, BIS may vote against the election of one or more directors if, in its assessment, the board has not responded sufficiently or with an appropriate sense of urgency to a shareholder proposal. BIS may also support a proposal if management is on track, but it believes that voting in favor might accelerate efforts to address a material risk.
Most of the other changes are clarifications & what the more cynical among us would call “refined corporate-speak” around ESG/sustainability, BIS’s focus on long-term financial value, and its voting authority. A new 15-page spotlight from BIS – with input from the BlackRock Investment Institute – underscores the asset manager’s focus on “financial resilience” in the face of big geopolitical & economic changes, AI disruption, demographic changes, and the worldwide transition to a low-carbon economy. If you’re engaging with BlackRock this year, expect questions on these topics.
– Liz Dunshee
In addition to updating its Global Principles and Voting Guidelines, BlackRock Investment Stewardship has also refreshed its Engagement Priorities. Here’s the bottom line, according to BIS:
BIS’ Engagement Priorities for 2024 are consistent with those from prior years as they continue to reflect the corporate governance norms, that in our view, drive long-term financial value. There are no material changes in our approach to engaging companies on these themes.
We do note however, that the macroeconomic and geopolitical backdrop companies are operating in has changed. This new economic regime is shaped by powerful structural forces that we believe may drive divergent performance across economies, sectors, and companies. Amid these shifts, we are particularly interested in learning from investee companies about how they are adapting to strengthen their financial resilience.
In our Viewpoint, Financial resilience in a new economic regime, we highlight the structural shifts that we believe are shaping this new regime and discuss how companies are adapting to manage risks and harness opportunities spurred by it.
The Investment Stewardship team provides more detail on engagement priorities – including how it discusses these topics with companies – in its 7 thematic commentaries:
1. Board Quality & Effectiveness
2. Strategy, Purpose, & Financial Resilience
3. Incentives Aligned with Financial Value Creation
4. Climate
5. Natural Capital
6. Human Capital Management
7. Companies’ Human Rights Impact
– Liz Dunshee
If you were following Dave’s dispatches last week from the Northwestern Securities Regulation Institute, you know that the week was both informative & eventful. I always find it energizing to catch up with friends & fellow practitioners who come from across the country to geek out together over securities law. When you throw in a flash flood and a SPAC release, there is definitely a lot of bonding.
One thing that made this year extra special was that our editorial team for TheCorporateCounsel.net was there in force! If we didn’t catch you at this conference, let’s connect at the next one – the Proxy Disclosure & Executive Compensation Conferences will be here before we know it!
– Liz Dunshee
It’s hard to believe that 7 years have passed since the SEC issued its report declaring that digital assets were “securities” and former Chair Jay Clayton cautioned investors to be wary of unregistered offerings of tokens (or “ICOs,” as they were called back then). This WSJ article calls the SEC’s fight with the crypto industry the agency’s “forever war.” They might be right! The saga isn’t showing signs of wrapping up anytime soon.
Later this month, a judge will hear the Commission’s most-watched crypto case – against Coinbase. The SEC recently shot down the crypto exchange’s rulemaking petition (despite disagreement from Commissioners Peirce & Uyeda). The SEC’s letter reiterates the view that the existing securities law framework will work just fine for digital assets and coming up with a special framework is not a regulatory priority at this time:
The Commission disagrees with the Petition’s assertion that application of existing securities statutes and regulations to crypto asset securities, issuers of those securities, and intermediaries in the trading, settlement, and custody of those securities is unworkable.
Although the formal letter denying the petition was brief, the supporting statement from SEC Chair Gary Gensler was not. Here’s an excerpt:
Existing laws and regulations already apply to the crypto securities markets.
There is nothing about the crypto securities markets that suggests that investors and issuers are less deserving of the protections of our securities laws. Congress could have said in 1933 or in 1934 that the securities laws applied only to stocks and bonds. Instead, Congress included a long list of 30-plus items in the definition of a security, including the term “investment contract.”
As articulated in the famous Supreme Court decision, SEC v. W.J. Howey Co., an investment contract exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. The Howey Court said that the definition of an investment contract “embodies a flexible, rather than a static, principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” This test has been reaffirmed by the Supreme Court numerous times—the Court cited Howey as recently as 2019.
But wait, there’s more. The Coinbase hearing will follow a recent court victory for the SEC in its case against a token issuer – Terraform – in which the Commission alleged that token sales violated Section 5 of the Securities Act. The company’s defense turned on whether the tokens were “securities” – and the case is going to a civil trial after US District Judge Jed Rakoff issued this 71-page opinion in late December. Judge Rakoff applied the “Howey test” to UST, LUNA, wLUNA, and MIR and found they passed “with flying colors.” Here’s an excerpt (see this Coingeek article for more commentary):
Defendants’ first argument in effect asks this Court to cast aside decades of settled law of the Supreme Court and the Second Circuit. In the seminal decision of SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), the Supreme Court held in no uncertain terms that “an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” Id. at 298-99, 66 S.Ct. 1100. Defendants urge this Court to scrap that definition, deeming it “dicta” that is the product of statutory interpretation of a bygone era. The Court declines defendants’ invitation. Howey’s definition of “investment contract” was and remains a binding statement of the law, not dicta. And even if, in some conceivable reality, the Supreme Court intended the definition to be dicta, that is of no moment because the Second Circuit has likewise adopted the Howey test as the law. See, e.g., Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d Cir. 1994).
There is no genuine dispute that the elements of the Howey test — “(i) investment of money (ii) in a common enterprise (iii) with profits to be derived solely from the efforts of others” (id.) — have been met for UST, LUNA, wLUNA, and MIR.
The WSJ article says it’s unlikely we’ll see a resolution this year to the Coinbase litigation or the bigger question of whether & how SEC regulations apply to digital assets. There are very bright & experienced lawyers on both sides of the SEC’s battle to regulate crypto, and it looks like they’re all digging in for a long fight.
– Liz Dunshee
Someone once told me that if you can understand Rule 144, you can conquer anything. It’s such a complex rule that we have an entire “Q&A Forum” dedicated to it! This 13-page Cleary memo can help you get your bearings, though. It walks through the various terminology and regulations that apply to resales of restricted & control securities – and has a handy one-page flow chart at the end for navigating Rule 144. It’s worth a bookmark!
– Liz Dunshee
Meredith blogged last month about SEC Chair Gary Gensler’s “fireside chat” at the Winter Meeting of the ABA’s Federal Regulation of Securities Committee. I was there in person and can attest that it was a thoughtful conversation.
Here’s the audio recording – the first 20 minutes are the Chair’s prepared remarks on the SEC’s role in corporate governance and recent rulemaking. At 23:00 minutes, the Q&A portion begins – which included commentary on regulating crypto, among other things.
– Liz Dunshee
Yesterday, the SEC announced that Commissioner Mark Uyeda has been sworn in for his second term, following confirmation by the Senate in late December. Commissioner Uyeda’s first term began in June 2022 and lasted for only one year, because he was filling the vacancy created by the departure of former SEC Commissioner Elad Roisman. Commissioner Uyeda’s new term expires in 2028.
Gunster’s Bob Lamm recently blogged about a speech from Commissioner Uyeda that gives some food for thought…
– Liz Dunshee
In an August webcast on this site and PracticalESG.com, legal & DEI experts joined us to explain what leaders of corporate DEI programs should be doing following the June SCOTUS decision in Students for Fair Admissions v. Harvard. This Wolters Kluwer article gives an updated look into how DEI website messaging is – and isn’t – changing at companies targeted by litigation in the past few months.
The updated language tends to replace references to specific minority or underrepresented groups with more general references to diverse or marginalized communities. The article notes that at least one company continues to list numerical representation goals on its website.
In our webcast, Orrick’s J.T. Ho walked through applicable legal frameworks & predicted that pressure on DEI programs is ultimately going to result in better disclosure. Here’s an excerpt:
Ultimately, a lot of the companies that we’re talking about here are Delaware corporations and they have a duty to their shareholders to increase value and everything else. There’s a good argument that a lot of the initiatives that are currently in place do a lot toward enhancing shareholder value. Human capital is an important resource. It’s an asset that has a lot of value, is intangible in nature and hard to quantify. It’s important to attract, retain and train a qualified workforce, and diversity is a big part of that. If companies look within themselves and think about their key priorities from a business perspective, they will see that DEI is probably one of them.
With that in mind, building programs that enhance and create value is key. Doing it in a way that complies with the law is all you need to be thinking about and not so much, “Let’s ignore these programs altogether. Let’s not do them.” As long as you’re thinking about it in terms of what ultimately matters from a corporate fiduciary standpoint and an employment lens and doing what you think ultimately is right for the business, and being thoughtful and careful in that approach, I think companies are going to be OK.
The question was, what can you say to bolster confidence? That’s what I would say. I think that over time, we’re going to see these programs become better disclosed. They’re going to be created in a way that’s more thoughtful from a legal perspective. Ultimately, we’re all just going to see that a few years from now, there is going to be a significant impact on shareholder value. I think that’s going to be a big focus for shareholders going forward from an institutional perspective, regardless of what the political climate is going to be.
Check out the full transcript for more commentary & practical tips. If you aren’t already a member with access to that transcript, sign up online or email sales@ccrcorp.com.
– Liz Dunshee
What will happen with DEI-related disclosures in the coming proxy season? Please participate in this anonymous poll to share your predictions (you can vote for up to 3 choices):
– Liz Dunshee
I blogged a few months ago about proposed changes to NYSE Rules 312.03(b) and 312.04 that would make it easier for companies to raise money from certain existing shareholders who are “passive” in nature. The SEC has now approved the amendment – as amended & restated by this late-December NYSE filing that gives additional reasons for the proposal and refines the wording.
Here’s the text of the rule change. This Cooley blog explains how it will make capital raising easier in some situations:
As amended, the rule change will add a new definition of an “Active Related Party” for purposes of Section 312.03(b)(i), but also retain the existing broader concept of “Related Party” for purposes of Section 312.03(b)(ii). Under the amended rules, the Section 312.03(b)(i) shareholder approval requirement will be limited to sales to an Active Related Party, that is, a director, officer, controlling shareholder or member of a control group or any other substantial security holder of the company that has an affiliated person who is an officer or director of the company.
Affiliation will be determined taking into account all relevant facts and circumstances, including whether the person is an affiliate as defined under the federal securities laws. The rule will also import other federal securities law definitions, specifically including in amended Section 312.04, (i) a “group,” as determined under Section 13(d)(3) or Section 13(g)(3) of the Exchange Act; and (ii) “control” as defined in Rule 12b-2 of Reg 12B under the Exchange Act. For purposes of determining a “control group,” the NYSE will look to Schedules 13D or Schedules 13G disclosing the existence of a group, along with any additional follow-up inquiry that is needed. The release indicates that the NYSE “intends to revise its internal procedures in reviewing proposed transactions to the extent necessary to obtain the necessary information to make determinations with respect to whether shareholders participating in transactions are Active Related Parties.”
Shareholder approval is still required for issuances that don’t fit within this carveout. Here’s more detail from the NYSE’s filing:
In addition to the proposed definition of Active Related Party in the proposed amended version of Section 312.03(b)(i), the Exchange proposes for purposes of Section 312.03(b)(ii) to retain the broader definition of a Related Party included in the current rule (i.e., “a director, officer or substantial security holder of the company”). Consequently, this proposal would not have any substantive effect on the application of Section 312.03(b)(ii) and a listed company selling securities to a Related Party under the circumstances set forth in the rule as amended remains subject to the shareholder approval requirements in that provision.
The Exchange also notes that any listed company selling securities in a private placement that does not meet the Minimum Price requirement will remain subject to the shareholder approval requirement of Section 312.03(c) if such transaction relates to 20 percent or more of the issuer’s common stock. In addition, if the securities in such financing are issued in connection with an acquisition of the stock or assets of another company, shareholder approval will be required if the issuance of such securities alone or when combined with any other present or potential issuance of common stock, or securities convertible into common stock in connection with such acquisition, is equal to or exceeds either 20 percent of the number of shares of common stock or 20 percent of the voting power outstanding before the issuance.
Sales of securities will also continue to be subject to all other shareholder approval requirements set forth in Section 312.03 (including limitations with respect to equity compensation under Section 312.03(a) and Section 303A.08) and the change of control requirement of Section 312.03(d). The Exchange notes that Section 312.04(a) provides that shareholder approval is required if any of the subparagraphs of Section 312.03 require such approval, notwithstanding the fact that the transaction does not require approval under one or more of the other subparagraphs.
Under the proposal the Exchange will continue to require shareholder approval for below market sales (i.e., below the Minimum Price) over one percent to Active Related Parties. However, as a consequence of the proposed amendment, below market sales over one percent to substantial securityholders who are not Active Related Parties will be permitted without shareholder approval under 312.03(b)(i), but will continue to be subject to all the other applicable shareholder approval requirements under 312.03.
– Liz Dunshee
