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.
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…
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.
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):
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.
I recognize that many folks involved in the “D&O questionnaire” process view this annual exercise as no more than a “necessary evil” that must be tolerated and made as painless as possible (that’s why we have a “D&O Questionnaire Handbook” with an annotated questionnaire for members). But this recent blog from Woodruff Sawyer’s Lenin Lopez points out that it could be a good opportunity for discussion & training on conflicts of interest:
It’s easy to ask directors to disclose any potential conflicts of interest. The challenge is how to do so in a way that translates into directors openly disclosing any potential conflicts of interest to the company. This is not to say that directors would intentionally look to avoid disclosure. Rather, it is more a matter of education about what types of director-level conflicts they should be on the lookout for. A brief walkthrough of a case like the one discussed in this article can be the basis for a fruitful discussion with the board well in advance of any actual potential conflict of interest arising. As a practice point, this type of discussion may be worthwhile holding in parallel with your company’s annual director and officer questionnaire process or review of the company’s code of conduct.
Why is it worth having these conversations when “fiduciary duties” can also put folks to sleep? Well, every corporate lawyer is bound to face thorny director conflicts of interest at one point or another – and courts continue to interpret the types of relationships that could be problematic. If a director’s loyalty is challenged, you don’t want to be the one who failed to tell them about the issue on the front end – or failed to create a supportive record. The blog summarizes a scenario that the Delaware Supreme Court recently addressed. Here’s an excerpt:
We have previously covered developments in Delaware courts’ view of director independence, including in the context of business and personal relationships. Delaware courts continue to look beyond traditional situations where independence was historically questioned, like financial relationships, and expand their view to include personal relationships, involvement with charities, overlapping business networks, and even shared ownership of aircraft. Two additional situations where Delaware courts have focused their independence assessment, and which may come as a surprise, are personal admiration and director income. In Re BGC Partners, Inc. Derivative Litigation addressed both situations.
On its way to upholding a ruling in favor of the company to dismiss the case (which John wrote about on DealLawyers.com), the court considered a creative argument from the plaintiff that a “teary-eyed” deposition cast doubt on a director’s willingness to consider a demand to sue the company’s Chair & CEO. In doing so, the court considered whether the record showed that the director’s respect for the Chair & CEO was so personal or of such a “bias producing” nature that it would have clouded his judgment.
The blog goes on to offer strategies to help ensure that board decisions get the benefit of the business judgment rule if they are challenged. In addition to encouraging transparency through training, Lenin notes that it’s important to maintain a contemporaneous written record that demonstrates directors were disinterested in their decision making. The court’s commentary shows that it will review this record.
Last month, the House Financial Services Committee’s Capital Markets Subcommittee held a hearing on “Examining the Agenda of Regulators, SROs, and Standards-Setters for Accounting, Auditing” – with testimony from PCAOB Chair Erica Williams, FASB Chair Richard Jones, and FINRA President & CEO Robert Cook. The livestream is here – and at approximately the 30-minute mark, Subcommittee Chair Ann Wagner (R-Missouri) recaps “deep concerns” with the costs & diversion of attention that are likely to occur if the PCAOB moves forward with its recently proposed standards on “Noncompliance with Laws & Regulations” and individual accountant liability.
In her testimony, PCAOB Chair Erica Williams defended the proposals and says that the PCAOB is considering feedback that has been provided. Here’s an excerpt:
We also proposed a new standard on noncompliance with laws and regulations, or NOCLAR. When auditors fail to identify noncompliance with laws and regulations that have a material impact on a company’s financial statements – or fail to take the proper steps to evaluate and communicate that noncompliance – investors pay the price.
Unfortunately, the current standard is 35 years old, and we have seen far too many examples of investors getting hurt due to noncompliance with laws and regulations since it was adopted.
Well-publicized issues relating to Wells Fargo offer just one example. Earlier this year, Wells Fargo agreed to pay $1 billion to settle a class-action lawsuit from investors alleging it made misleading statements about compliance with consent orders imposed by federal regulators. A lawyer for those investors underscored just who gets hurt when these incidents happen: “state employees, nurses, teachers, police, firefighters and others – whose critical retirement savings were impacted by Wells Fargo’s fraudulent business practices.”
When these kinds of incidents happen, the question almost inevitably follows, “where was the auditor?” In fact, our PCAOB advisory groups, made up of investors and other stakeholders, have cited to at least one study that shows auditors are currently only finding about 4% of fraud – which is certainly not consistent with what most investors expect.
In the fall, we issued a proposal on a rulemaking project that would hold associated persons accountable when they negligently, directly, and substantially contribute to firms’ violations. The proposal is designed to make sure PCAOB rules match what investors already expect: that when an associated person’s negligence directly and substantially contributes to firm violations that can put investors at risk, the PCAOB has the tools to hold them accountable.
The Q&A portion of the meeting suggests that the PCAOB will be holding a public roundtable for additional feedback on the NOCLAR proposal. Stay tuned!
Happy New Year! As Dave says, “For securities lawyers, every year is a roll-forward of the last one.” I take that to mean we get better every year – with incremental improvements & updates to our disclosures (and with any luck, ourselves). When it comes to your upcoming “risk factors” update, this White & Case memo identifies 6 key trends to consider:
– Cybersecurity
– Artificial Intelligence
– Macroeconomic Considerations: Uncertainty, Interest Rates and Inflation
– International Geopolitics
– Climate
– Internal Controls
In addition to considering whether the above developments have had – or are expected to have – a material impact on your company’s business, financial condition and operating results, now is also the time to make sure your existing risks are appropriately described. The memo shares these 5 drafting reminders:
– Avoid boilerplate disclosures
– Carefully Scrutinize Hypothetical Statements
– Review for Internal Consistency
– Update or Delete Risk Factors That Have Changed in Importance or Are No Longer Relevant
– Consider the order & organization of your risk factors, and don’t forget a “Risk Factor Summary” if your disclosure exceeds 15 pages
Check out the full memo for more color on each of these topics, as well as our “Risk Factors” Handbook and Practice Area for members.
In this 3-page memo released last month, the Vanguard Investment Stewardship team gives insight into how it analyzed shareholder proposals at 4 companies calling for third-party audits of workplace safety practices.
Vanguard emphasizes its case-by-case approach to these shareholder proposals, based on the relevant company’s facts & circumstances. The asset manager explains factors – e.g., disclosure about board oversight and quantitative improvements in safety metrics, etc. – that led to it voting against the proposals at each of the companies. The “against” votes occurred even though Vanguard determined that worker health & safety was a material risk for all 4 of the companies, so for other companies where this is a big issue, these examples are worth checking out. Here’s what Vanguard looks for from all portfolio companies on this topic:
On behalf of the investors in Vanguard-advised funds, we believe that companies should focus on issues that are material to their business. We look for boards to have the appropriate skills and expertise to identify and oversee material risks, to understand how risks could affect shareholder value creation at the companies they oversee, and to provide clear, decision-useful disclosure on oversight and management of the company’s material risks.
Portfolio companies should adhere to applicable labor laws and, where material, maintain oversight of workplace health and safety risks. We further look for boards to appropriately challenge management and regularly reevaluate risk-mitigation practices if the degree of financial materiality or the manifestation of a specific risk changes over time.
In engagements with portfolio companies, we seek to understand how boards oversee material risks, including those that relate to human capital management. Although the Vanguard-advised funds do not seek to dictate company strategy or day-to-day operations, we continue to engage boards on how they define materiality related to human capital risks, their oversight process for mitigating material risks, and how they disclose material risks to investors.
We’ve posted the transcript for our recent webcast – “More on Clawbacks: Action Items and Implementation Considerations” – during which Compensia’s Mark Borges, Ropes & Gray’s Renata Ferrari, Gibson Dunn’s Ron Mueller and Davis Polk’s Kyoko Takahashi Lin continued their excellent discussion from our 20th Annual Executive Compensation Conference on complex decisions and open interpretive issues that unlucky companies faced with a restatement will need to tackle. They covered:
– What to do if a restatement occurs
– Whether to amend other policies and agreements, or update other disclosures
– Maintaining your policy going forward (we are all going to get smarter about these policies over time!)
Members of this site or of CompensationStandards.com can access the transcript to this program and all of our other webcasts by visiting the “archives page“. If you’re not a member, sign up today to get access to this essential guidance!
Also, if you are a member, make sure to confirm with your knowledge management folks that your subscription has been renewed. Many of our subscriptions run on a calendar-year basis, and you don’t want any interruption in access as we head into proxy season.
