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.
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…
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
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.
Earlier this year, the Delaware Chancery Court allowed a claim to proceed against an officer that was premised on alleged oversight failures that caused a breach of their duty of loyalty. This is a big deal because it’s the first time the court has applied Caremark duties to an officer.
This Sidley memo suggests action items for companies & officers to ensure that those individuals are aware of their duties – as agents & as fiduciaries – so that they are getting info to the board that allows directors to perform their own roles effectively, and also so that the officers aren’t acting (or failing to act) in a way that could result in personal liability. Here are the suggested action items for companies:
– Consider providing officer training covering officer fiduciary duties and officer responsibilities as agents of the corporation.
– Include real-world scenarios and Q&As to help officers understand their duties in practice.
– Ensure officers know when and how to report up regarding “red flags.”
– Because officers’ duty of oversight is context-driven, ensure that roles and responsibilities are clearly defined and understood, both by the board and by management.
– Consider whether the processes for developing board materials is sufficiently robust to cover major areas of potential risk and which officers should regularly report to the board.
– Ensure that board materials and minutes reflect that the board has been informed of potential risks, how they are addressed and which officers are responsible.
– If permitted under applicable law (as in Delaware since 2022), consider amending the corporate charter to provide for officer exculpation.
Accounting is the latest profession where “nobody wants to work anymore.” That’s according to this WSJ article, which says that the shortage of good help is starting to show up in corporate disclosures as a material weakness. Here’s an excerpt:
Nearly 600 U.S.-listed companies of a total 7,359 reported material weaknesses related to personnel, typically in accounting or information technology, this year through June, down 5.2% from the prior-year period, but up 40.6% from the 2019 period, according to a review of filings by research firm Bedrock AI.
The article says that, while strained resources aren’t unusual at smaller companies, the difference now is that even large companies are affected – and it’s because they’re having trouble filling the roles, not because they’ve decided to eliminate positions. US-listed companies that are based in other countries are having a particularly difficult time retaining accounting personnel who are qualified to handle their complex issues. The article also predicts that the material weaknesses could lead to a wave of restatements.
On a somewhat related note, make sure to mark your calendar for our webcast, “Non-GAAP Developments: Enhancing Your Policies and Procedures” – next Thursday, July 20th, at 2pm Eastern. Hear from Honigman’s Mike Ben, Deloitte’s Pat Gilmore, Faegre Drinker’s Amy Seidel, and Covington’s Matthew Franker about non-GAAP developments and how you should be revamping your related disclosures, policies, procedures and controls. If you’re not already a member with access to this webcast, sign up online for a no-risk trial or email sales@ccrcorp.com.
Late last week, Nasdaq announced that its “Nasdaq 100” index will undergo a “special rebalance” – i.e., outside of its regular rebalancing schedule. The specific changes will be announced tomorrow and will take effect prior to the market open on Monday, July 24th.
This is the first-ever special rebalance for this particular index, which tracks 100 of the largest Nasdaq-listed domestic & international non-financial companies. As you might guess, this includes a lot of “Big Tech.” Here’s more detail from Reuters:
A special rebalancing, which is part of Nasdaq 100’s methodology to maintain compliance with a U.S. Securities and Exchange Commission rule on fund diversification, has taken place twice before, in 2011 and 1998, said Cameron Lilja, global head of index product and operations at Nasdaq.
The special rebalancing may be conducted at any time if the aggregate weight of companies, each having more than 4.5% weight in the index, tops 48%, according to Nasdaq. During the rebalancing, it is capped at 40%.
Nasdaq says that no companies will be added or removed from the index at this time – the rebalance will just adjust the relative weightings of companies in the index. The impact to companies in the index is that funds will need to buy & sell shares of the companies whose weighting changes. There’s some speculation that other indices will need to follow suit so that their customers don’t run afoul of the SEC’s diversification rule, but no announcements yet.
Earlier this week, I shared sample disclosures that could be used as a starting point for the new Item 408(a) info that will be required in the next Form 10-Q for most companies. Several interpretive questions are coming up as companies begin to apply this rule to their real-world circumstances. Here are a few common scenarios that our members have asked about on our Q&A Forum (#s 11,370, 11,514, and 11,715):
1. Would an ESPP would be considered a non-rule 10b5-1 trading arrangement that triggers disclosure under the new line item?
2. Would natural expiration of a 10b5-1 plan during the most recent quarter constitute a “termination” of a plan or arrangement that requires disclosure?
3. During the most recent quarter, an executive officer retired and subsequently adopted a Rule 10b5-1 trading plan. Does the disclosure apply only to plans adopted or terminated at a time when an individual was a current executive or director?
For each of these items, my educated guess – with significant assists from John and K&L Gates’ Ali Nardali – is that the SEC did not intend for the rule to pick these up (unless, as John noted in his response to #3, the facts and circumstances suggest that the timing of the plan’s adoption was intended to evade the disclosure obligation that would otherwise arise). However, the Staff hasn’t publicly weighed in. I am keeping my fingers crossed for “Christmas in July” – CDIs!
In late June, the Supreme Court issued two opinions that should be on your radar for “human capital” (and disclosure) risks. In Groff v. DeJoy, the Court held that when it comes to accommodating employees’ religious practices, “an employer must show that the burden of granting an accommodation would result in substantial increased costs in relation to the conduct of its particular business.” In a panel I moderated for the American College of Governance Counsel right after this opinion was issued, Stanford Law’s Joe Grundfest said that this decision could open the floodgates to religious accommodation requests and will heighten risks & complexities for companies.
I’m not going to pretend to be an employment lawyer here – so consider this blog a reminder to consult with the experts. But this Goodwin memo summarizes potential implications so that you – and your board and management team – can issue-spot. Here’s an excerpt:
The Groff Court emphasized that context matters in assessing whether a religious accommodation imposes an “undue hardship” on employers. Before denying requests for religious accommodation, employers must be able to show that the cost to their business of accommodating a religious request would be excessive or unjustifiable. If relying on the burden placed on other employees as the basis of the undue hardship, employers must be able to demonstrate how the accommodation’s impact on other employees would substantially affect the conduct of the business itself. This may be an easy burden to meet when the accommodation would impose health and safety risks to co-workers. It also continues to be satisfied in the Hardison context, that is, where scheduling adjustments cannot be accommodated with collectively bargained seniority rights. However, for scheduling requests to accommodate Sabbath observance or prayer breaks, it will be harder to distinguish when burdens on other employees are sufficient create a “substantial cost” to the conduct of the business.
Many employers that implemented COVID-19 vaccine mandates received requests for exceptions from the mandates based on religious objections to vaccinations, often seeking to work remotely as an alternative to vaccination. In some cases, employers relied on the “more than a de minimis cost” language to justify the denial of such requests. Under the standard set forth in Groff, however, such an employer would be required to grant an option such as remote work, unless it could show that granting the accommodation would result in substantial increased costs in relation to the conduct of its business.
Employers should ensure that those employees who are responsible for considering religious accommodations understand that the commonly relied upon “more than a de minimis cost” language is not the legal standard for assessing undue hardship, and that instead an employer may not deny a religious accommodation based on undue hardship unless the employer faces “substantial increased costs in relation to the conduct of its particular business.” Furthermore, the decision emphasizes the need for employers to demonstrate respect for individuals’ religious beliefs, since employee or customer hostility based on religion cannot be a consideration in assessing proposed accommodations for religious beliefs or practices.
The other big end-of-term SCOTUS development that could impact “human capital” risks was the decision in two companion cases that struck down the use of “affirmative action” in college admissions. You might think that companies can ignore this holding since it directly applies only to educational institutions and isn’t interpreting the laws that specifically apply to private businesses, but this Morrison Foerster memo explains several ways in which corporate DEI programs could be affected.
Corporate governance and securities advisors need to be aware of these issues because many companies have been increasing their disclosures about DEI programs & metrics – either in SEC filings or on their websites. That means you need to be able to spot disclosures that could imply that the company is engaged in risky practices.
Beyond the disclosure, if human capital is a significant issue at your company, you may need to collaborate with the DEI team, HR, and employment lawyers to be able to update the board on management’s assessment of risks and any significant changes to practices. As the MoFo memo alludes to, a handful of companies are already facing litigation.
The memo suggests taking the following steps to mitigate risks (also see this Cooley memo):
1. Review DEI Programs for Vulnerabilities: Companies should review existing DEI efforts with an eye toward areas of vulnerability and confirm that the initiatives do not create unlawful preferences based on protected characteristics or include quotas or set asides. Employers should consider including race-neutral factors, such as socioeconomic status, first-generation professionals, and geographic diversity, which could help increase diversity in the workplace while mitigating the risk of potential challenges.
2. Review Written DEI Materials: Employers should review their DEI program materials for any statements that describe their companies’ practices in a manner that could be viewed as unlawful. In some cases, plaintiffs have used statements in DEI policies and literature to support reverse discrimination claims.
3. Justify Efforts for DEI Programs: Employers should be prepared to justify the importance of their existing DEI programs and how those programs are consistent with the law.
4. Train Leadership and Managers: Companies should ensure that their leaders and managers are educated on the benefits and objectives of the companies’ DEI and affirmative action programs. It will be important for managers to understand what DEI means and that they cannot give preferential treatment to underrepresented groups when making employment decisions.
5. Review Diversity Trainings for Risk: Employers should review current diversity trainings, including unconscious bias training, considering recent legislation aimed at limiting DEI programs and trainings that might make their programs vulnerable to attack.
6. Monitor State Laws on DEI: Companies should continue to monitor state and local laws and regulations aimed at limiting or requiring DEI efforts to ensure compliance with those laws.
All that said, the EEOC also issued a press release about the ruling, which says:
It remains lawful for employers to implement diversity, equity, inclusion, and accessibility programs that seek to ensure workers of all backgrounds are afforded equal opportunity in the workplace.
This Covington memo walks through the context of that statement, summarizes EEOC guidance that applies to DEI programs and distinguishes them from “affirmative action,” and concludes:
In considering what initiatives could be targeted for litigation, employers should give thought to the extent to which their DEI efforts and initiatives implicate tangible employment actions or, instead, promote a more equitable and inclusive work experience.
Companies may take different approaches in responding to this SCOTUS decision and the general “anti-woke” backlash. For example, some may issue statements to employees and other stakeholders that they’ll continue to prioritize DEI in a way that’s consistent with the Court’s decision, and others may decide that it’s better not to comment. I know Ngozi will be sharing her valuable perspective as a DEI leader, including thoughts on preserving a diverse talent pipeline, over on PracticalESG.
