The specter of a successful securities class action suit is another risk that keeps securities lawyers up at night, but take heart: Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse recently published their latest report, Securities Class Action Filings—2023 Midyear Assessment, and it gives some encouraging news.
While the number of securities class-action filings has remained pretty steady compared to historical averages, US exchange-listed companies are actually less likely to face these types of lawsuit than they were from 2009 – 2022. Here’s more detail:
– At the current pace, only 3.4% of companies listed on major US exchanges are or will become subject to a core or M&A filing in 2023. This is in line with the percentage in 2022 but represents a large decline from 2016-2020 levels.
– The percentage of US exchange-listed companies subject to a core filing in 2023 H1 was 1.6%, on pace to be in line with that of 2022 but below the 2009-2022 average.
– The percentages of US exchange-listed companies subject to an M&A filing in 2022 and 2023 are the two lowest since tracking of M&A filings began in 2009. These rates remain well below 2016-2020 levels.
See the 33-page report for details on all sorts of key trends.
– Liz Dunshee
The comment period for the PCAOB’s “NOCLAR” proposal officially concluded yesterday – and although more comments will continue to roll in, now seems like a good time to take stock of the feedback to-date. As of the date of this blog, the PCAOB has posted 26 comment letters. Here are a few that caught my eye:
– Council of Institutional Investors – supporting the proposal, and encouraging the PCAOB to further expand the independent auditor’s responsibilities with respect to the company’s internal whistleblower program to include (i) requiring the auditor to obtain an understanding of the audit committee’s and management’s policies, processes and procedures for the program; (ii) testing controls to determine if the process operates as it is expected to; and (iii) reviewing and assessing complaints that are reasonably likely to have a material effect on the financial statements.
– Audit Committee Council (advisory committee of the Center for Audit Quality comprised of independent audit committee members) – supportive of modernizing accounting standards, but sharing the concerns on this proposal that were expressed by the dissenting PCAOB board members, and suggesting a more risk-based approach where the auditor considers the role that the company’s compliance program plays in detecting NOCLAR that could be material to the audited financial statements.
– Auditing Standards Committee of the Auditing Section of the American Accounting Association – 31-page letter (!) to list “a number of fundamental concerns” that prevent the participating members from supporting the the proposal.
– US Chamber of Commerce – Requesting that the PCAOB withdraw the proposal because it “could degrade audit quality, harm investor protection, weaken attorney
client privilege protections, and impose additional audit costs on issuers by an estimated $36 billion dollars, far exceeding Sarbanes-Oxley 404b implementation.”
– Jon Lukomnik (well-known corporate governance thought leader – e.g., a member of Deloitte’s Audit Quality Advisory Committee and the PCAOB’s Standards and Emerging Issues Advisory Group, former member of the PCAOB’s Standing Advisory Group) – generally supporting the proposal, but suggesting improvements to address the critiques of “over-reaching.” Specifically, recommending two types of noncompliance that auditors should plan to identify, evaluate and, if necessary, communicate – systemic noncompliance, and noncompliance by senior officers or senior management responsible for a quantitatively material amount of revenue, profit or fixed assets.
– Society of Corporate Compliance and Ethics – supporting the proposal, but strongly recommending further refinement on a few specific points.
I blogged last month about the potential impact of this standard on audit committee members. As this Perkins Coie blog notes, the Center for Audit Quality has posted a two-page letter for audit committee members to sign on to, which expresses concerns with the proposal. Other organizations, including the Society for Corporate Governance and the American Bar Association, will likely also submit comments.
– Liz Dunshee
Here’s something I blogged last week on CompensationStandards.com: DEI-related goals have become one of the most common non-financial metrics in public company executive incentive plans. However, in addition to thinking through potential complexities and unintended consequences, you may also need to work with your employment law colleagues to take a closer look at those programs and related disclosures in light of June’s SCOTUS affirmative action decision, and related fallout.
To get more color on what executive compensation advisors should know, I’m delighted to share this guest post from Orrick’s J.T. Ho, Mike Delikat, John Giansello and Bobby Bee:
On June 29, 2023, the Supreme Court found Harvard and UNC’s admissions policies, which considered race and ethnicity as factors in admissions, to be unlawful under Title VI of the Civil Rights Act of 1964 and the Equal Protection Clause of the Fourteenth Amendment. While this ruling does not directly impact corporate DEI programs due to existing legal prohibitions on considering race in employment decisions, this case may embolden more applicants, employees, government officials like state Attorneys General and conservative activist groups to bring “reverse discrimination” claims and shareholder demands and proposals, a trend that already is on the rise.
Executive compensation programs that include DEI performance as a metric have already been and may continue to be a source of such claims and attacks. Many executive compensation programs in recent years have incorporated DEI metrics due to institutional investor demands. Such goals are often tied to increasing the number of women or diverse employees by a certain percentage, especially in higher-paid roles or retaining a certain percentage of such groups of employees, and have become more formulaic and rigorous over the years due to investor scrutiny.
However, while “the devil is in the details,” incorporating DEI metrics into executive compensation programs can lead to the risk that managers perceive the achievement of the metrics as a de facto quota and impel employment decision-making based on diversity metrics instead of individual qualifications and job performance—or the reasonable perception thereof, which could give rise to reverse discrimination claims. For example, in Frank v. Xerox Corp. (5th Cir. 2003), where the Fifth Circuit reversed summary judgment for Xerox on a reverse discrimination claim, the court noted that “[s]enior staff notes and evaluations also indicate that managers were evaluated on how well they complied with the [diversity] objectives,” among other factors. As a result, the Fifth Circuit noted a jury could find the company “had considered race in fashioning its employment policies” and that because of plaintiff’s race, “their employment opportunities had been limited.” According to the EEOC amicus brief filed on appeal, managers were evaluated on how well they followed and adhered to diversity objectives in making personnel decisions; numerical targets were considered in hiring, promotion or pay decisions; and money designated for merit pay increases was allocated based on achievement in specific “EEO categories.”
The court arrived at a different conclusion in Coppinger v. Wal-Mart Stores (N.D. Fla. Oct. 25, 2008), where the plaintiff alleged, among other things, that Wal-Mart tied manager bonuses to its diversity program involving two components: (1) placement goals, which measured the disparity between the rate at which women and minorities apply for managerial positions and the rate they obtained such jobs, and (2) good faith effort goals, which required all salaried managers to mentor three employees from diverse backgrounds and attend at least one diversity event each year. Although the court granted Wal-Mart’s summary judgment motion, the court noted that it did so because, despite the allegations, “no part of any decisionmaker’s bonus or compensation was related to placement goals or good faith efforts goals other than attending one diversity event each year.” Although the court concluded that the plaintiff had failed to point to any record suggesting that managers took the goals into consideration when making any employment decision, it left open the question of whether it would have held differently had such goals been more concretely tied to the managers’ evaluations or bonuses.
While there are few cases in this area to date, in light of the recent Supreme Court decision, companies who incorporate DEI metrics into executive compensation programs should do a privileged evaluation of their programs to determine whether their goals actually impact individual employment decisions, which can be problematic, or merely inspire broader initiatives, such as improvements in outreach and in the composition of candidate and interview pools or evaluation techniques, which is legally permissible. In other words, rewarding executives for their overall efforts on DEI rather than for achieving targeted metrics will mitigate some of the legal risk.
Further, whether goals involve hiring or retention is also relevant as what leads to employee retention is a complicated set of factors, including organizational culture, effective leadership and employee perceptions of working conditions, and it is often difficult to connect goals related to retention to any individual employment decision in hiring, promotion, termination or salary and benefits. Such analyses are complicated, and companies are advised to seek legal counsel and the benefits of privilege to ensure that factors that mitigate against the risk of reverse discrimination claims are being considered and implemented when constructing executive incentive plans.
This is certainly a challenging area, and we’ll be discussing practical ways to approach it at our virtual conferences that are coming up in less than 2 months – the “2nd Annual Practical ESG Conference” and the “Proxy Disclosure & Executive Compensation Conferences.” Here’s the action-packed agenda for the Proxy Disclosure & 20th Annual Executive Compensation Conference. Get guidance on navigating DEI oversight, disclosures & goals during these two panels:
– “Human Capital Management: Facing Down Heightened Complexities & Disclosures” – with Skadden’s Ryan Adams, Kirkland’s Sophia Hudson, Vontier’s Courtney Kamlet, and Aon’s Laura Wanlass
– “ESG Metrics: Beyond the Basics” – with Orrick’s J.T. Ho, Semler Brossy’s Blair Jones, Davis Polk’s Kyoko Takahashi Lin, and Pay Governance’s Tara Tays
Register today for this can’t-miss event. Bundle your registration with our “2nd Annual Practical ESG Conference” to get all the info & perspectives you need at the best price!
– Liz Dunshee
The July-August issue of the Deal Lawyers newsletter was just posted and sent to the printer. This month’s issue includes the following articles:
– The Universal Proxy Card: Transforming Board Elections and Activism
– Anti-Activist Pills: Will Coster v. UIP Companies Sound Their Death-Knell?
– That Time I Filed the Registration Statement When I Wasn’t Supposed To …
In case the title of the last article caught your eye, it recounts the story of what John calls “one of his biggest legal career blunders,” although we are all relieved to say that it does have a happy ending. Anyway, the Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without in order to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
– Liz Dunshee
That was fast. On Friday, the SEC’s cybersecurity disclosures were published in the Federal Register. Here’s an excerpt from the release that explains what that means for the effective date & compliance dates:
The final rules are effective September 5, 2023. With respect to Item 106 of Regulation S–K and item 16K of Form 20–F, all registrants must provide such disclosures beginning with annual reports for fiscal years ending on or after December 15, 2023. With respect to compliance with the incident disclosure requirements in Item 1.05 of Form 8–K and in Form 6–K, all registrants other than smaller reporting companies must begin complying on DECEMBER 18, 2023. As discussed above, smaller reporting companies are being given an additional 180 days from the non-smaller reporting company compliance date before they must begin complying with Item 1.05 of Form 8–K, on June 15, 2024.
With respect to compliance with the structured data requirements, as noted above, all registrants must tag disclosures required under the final rules in Inline XBRL beginning one year after the initial compliance date for any issuer for the related disclosure requirement. Specifically:
– For Item 106 of Regulation S–K and item 16K of Form 20–F, all registrants must begin tagging responsive disclosure in Inline XBRL beginning with annual reports for fiscal years ending on or after December 15, 2024; and
– For Item 1.05 of Form 8–K and Form 6–K all registrants must begin tagging responsive disclosure in Inline XBRL beginning on DECEMBER 18, 2024.
Don’t forget that we will be giving practical action items for these new rules at our “Proxy Disclosure & 20th Annual Executive Compensation Conferences” – coming up virtually September 20-22nd. Register online today through our membership center or by emailing sales@ccrcorp.com. Or, you can call us at 800-737-1271.
– Liz Dunshee
Following up on the largest-ever award only a few months ago, the SEC announced on Friday that it bestowed $104 million upon 7 whistleblowers whose information and assistance led to a successful SEC enforcement action and related actions brought by another agency. The combined payout is the 4th largest bounty in the history of the Commission’s whistleblower program. Here’s more detail:
The seven whistleblowers were composed of two sets of joint claimants and three single claimants, and each provided information that either prompted the opening of or significantly contributed to an SEC investigation. The seven individuals’ assistance to the staff included providing documents supporting the allegations of misconduct, sitting for interviews, and identifying potential witnesses.
As usual, the order is full of redactions to protect the confidentiality of the whistleblowers. But this one does say that many of them are foreign nationals who shared info about misconduct in what were probably non-US territories, which is a reminder that the SEC’s whistleblower program applies to securities law violations and tips from anywhere in the world. The order also gives a peek into the jockeying amongst the whistleblowers for how the combined award would be divided, and explains why two other individuals were denied from sharing in the payment – including one of the company’s lawyers:
Claimant 8 does not qualify for a whistleblower award. Because significant portions of the information submitted by Claimant 8 appeared to be derived from his/her employment as an attorney for Subsidiary, the TCR and subsequent information Claimant 8 submitted was deemed potentially privileged by an Enforcement filter team and either redacted or withheld from investigative staff.
Accordingly, Claimant 8’s information did not cause the staff to open the Investigation or to inquire concerning different conduct, nor did it significantly contribute to the Investigation. Claimant 8’s contention in his/her response to the Preliminary Determinations that his/her information is not privileged is not relevant—the staff did not review significant portions of Claimant 8’s information and thus Claimant 8’s information did not lead to the success of the Covered Action.
As to Claimant 8’s contention in his/her response that staff said Claimant 8’s information was “highly relevant” and “valuable,” staff indicated in a supplemental declaration, which we credit, that while the staff spoke briefly with Claimant 8, the purpose of the conversation was to determine the nature of Claimant 8’s employment responsibilities at Subsidiary. When the staff learned of Claimant 8’s role as an in-house counsel, the staff ceased the conversation so as not to infringe upon any attorney-client communication. For these reasons, Claimant 8 is not eligible for an award.
Here’s a useful index of awards that a law firm has published in order to summarize what led the SEC to grant or deny each whistleblower claim through the program’s history. If you are reading this as a lawyer who has discovered questionable activity and you are daydreaming of retiring on a whistleblower award, I am sorry to remind you of these extra constraints on sharing information that would lead to a successful enforcement action. But don’t forget that you will still need to report “up the ladder” under SEC rules!
– Liz Dunshee
In this 18-minute episode of our “Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed Wilson Sonsini’s Amy Simmerman. Amy leads the firm’s Delaware office and governance practice, and serves on Wilson Sonsini’s board of directors. She also guest-lectures at Harvard Law and the University of Pennsylvania Law School on governance matters. Listen to hear:
1. What led Amy to law school and how she ended up practicing in Delaware
2. Amy’s thoughts on whether Delaware law permits boards to consider “stakeholders” other than shareholders, and trends that she’s seeing in the boardroom on this topic
3. Whether companies are continuing to convert to Public Benefit Corporations
4. Other notable corporate trends – and Amy’s views on the pace of change in our field
5. The most common scenarios in which non-Delaware lawyers should call a Delaware lawyer, but don’t … and advice for how other lawyers can best partner with Delaware counsel
6. What Amy thinks women in the corporate governance field can add to the current conversation on the role of corporations in society
To listen to any of our prior episodes, 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.
– Liz Dunshee
I blogged just last month about the 9th Circuit’s decision to uphold an exclusive forum bylaw that effectively extinguished a shareholder derivative suit brought under Section 14 of the Exchange Act, on the basis of allegedly misleading proxy statement disclosure. That case created a circuit split with the 7th Circuit.
Now, a federal district court in the 5th Circuit has upheld a forum selection clause at SolarWinds that kicks a Section 10(b) derivative claim to Delaware Chancery Court – which, again, does not have jurisdiction to hear that federal claim. The anti-fraud allegations stem from the company’s 2020 cyber breach.
Alison Frankel analyzes the case in this Reuters article. Here’s an excerpt, which pulls in thoughts from Tulane’s Ann Lipton:
Pitman’s SolarWinds decision breaks new ground, said law professor Ann Lipton of Tulane University, because it extends forum selection enforcement to derivative 10(b) claims.
Shareholder derivative suits accusing board members of violating Section 10(b) are rare, Lipton said, so the ruling may not foreclose many cases. (Plaintiffs lawyers filed a spate of 10(b) derivative suits in the early 2000s against directors and officers of companies engaged in stock options backdating. More recently, shareholders alleged derivative 10(b) claims against Wells Fargo executives after revelations about fake bank accounts.)
But what Pitman’s decision signals, Lipton said, is the creeping effect of forum selection clauses. Companies first adopted them to channel M&A breach-of-duty suits to Delaware so businesses would not be forced to litigate the same claims in multiple courts. Then, after the U.S. Supreme Court confirmed in 2018 that shareholders can file Securities Act suits in either state or federal court, corporations used forum selection clauses to mandate federal court jurisdiction for litigation over allegedly misleading disclosures in offering documents.
Now the clauses have become a weapon to kill Exchange Act derivative claims — whether shareholders are alleging proxy violations or, as per Pitman’s new decision, 10(b) fraud claims.
This writeup from Cooley’s Cydney Posner provides even more context. It’s worth noting that there are strong views that derivative Exchange Act claims don’t provide any remedy that isn’t already available via a direct federal claim or a derivative state law claim. For companies, the bottom line is that it’s probably worthwhile right now to have an exclusive forum bylaw…
– Liz Dunshee
There’s a lot happening right now. Plus, if you’re like me, the summer season throws a big wrench in your ability to keep track of complicated details like which month it is. If you’re looking for a comprehensive update on “where things stand,” look no further than this 106-page Freshfields memo, which covers:
– Proxy season takeaways;
– Board, committee and director trends;
– Diversity at the leadership and workforce levels;
– Updates to SEC rules, including proposed rules; and
– Updates on institutional investors and proxy advisors.
Here are the latest stats on a few key governance topics covered in the memo:
– 71% of S&P 500 companies have one additional committee beyond their standing audit, compensation and nominating and governance committees
– The average number of committees is 4, which is basically unchanged for the past decade
– Over half of S&P 500 companies in 2022 elected at least one new director
– 33% of new S&P 500 directors are active or retired corporate executives, excluding CEOs but including line or functional leaders and division or subsidiary leaders, the same as 2021
– 14% of S&P 500 new independent directors are active CEOs or employed as chairs, presidents or COOs and an additional 12% are retired CEOs, chairs, presidents or COOs
– 37% of newly appointed directors have prior public director experience
– Average age of all independent directors is 63, unchanged since 2021
– Average tenure of S&P 500 directors is 7.8 years
– 70% of S&P 500 boards disclose a retirement age policy
– 7% of S&P 500 boards impose mandatory term limits, with most of those set at 15-20 years
– Liz Dunshee
In this 19-minute episode of the “Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed Fenwick’s Dawn Belt. Among other roles, Dawn is a Partner in Fenwick’s corporate group, co-leader of the firm’s Startup & Venture Capital Practice Area, co-author of Fenwick’s annual board diversity report, and spends significant time working to enhance diverse leadership at top tech companies. Listen to hear:
1. Predictions on where board diversity practices and disclosures will go in the next 5 years, in light of the current discourse on diversity and ESG
2. Diversity trends at executive and management levels
3. Common traits among women who are successfully leading Silicon Valley companies
4. The most important governance risks that tech companies are facing right now
5. What Dawn thinks women in the corporate governance field can add to the current conversation on the role of corporations in society
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.
– Liz Dunshee
