A Tennessee court has ruled against the US Chamber of Commerce and the Business Roundtable in a lawsuit that they brought last July to stop the SEC’s 2022 rulemaking on proxy advisors.
In that 2022 rulemaking, the SEC had rescinded parts of its 2020 rules and related guidance that would have required proxy advisors to provide voting reports to the subject companies at or before the time the reports went to investor clients, and to provide the investor clients with notice of any written statements by subject companies about the proxy advisor’s voting advice. Those provisions were favorable to companies in that they gave more of a chance to catch and correct perceived inaccuracies.
The business organizations accused the SEC of not properly following the Administrative Procedures Act in rolling back the 2020 rules. In granting the SEC’s motion for summary judgment, the court said:
Neither argument has any merit, because the plaintiffs have not identified any way in which similarly situated parties have actually been treated differently. Rather, they have identified two extraordinarily abstract questions that come up in countless settings and that, unremarkably, are often answered differently in different circumstances.
Nearly every regulatory decision involves making a choice between using government power to coerce the regulated parties or leaving those parties to their own devices. And nearly every regulation involving the exchange and/or production of information requires the relevant agency to favor more or less transparency. The fact that the SEC often favors transparency and oversight does not mean that it is locked into a policy of maximal transparency and maximal oversight every time it promulgates a rule. Such an approach would have no basis in caselaw, the text of the APA, or the text of the Exchange Act.
The 2022 iteration of the proxy advisor rules isn’t out of the woods quite yet. The National Association of Manufacturers also challenged the SEC’s 2022 rules, and that lawsuit is still pending.
The SEC has never been super cozy with the crypto industry, but things have gotten especially prickly lately. In one of the latest illustrations of friction, Coinbase recently filed an action in US federal court to compel the Commission to respond to the rulemaking petition it submitted last summer. This “flipping the tables” move follows the company’s disclosure in March that the SEC is investigating it.
A blog post from Coinbase chief legal officer Paul Grewal explains the company’s motivations for filing the legal action – which takes the form of a petition for writ of mandamus to the SEC. This Reuters article from Alison Frankel gives more detail on why the move is so unusual:
In the rare instances in which regulated businesses have persuaded appellate requests to order federal agencies to respond to their rulemaking petitions, the allegedly unreasonable delay has been a matter of years, not months.
As Alison notes, the action says that Coinbase has met with the SEC more than 30 times over the past year to present paths to registration for digital assets. In light of the Commission’s stepped-up enforcement stance against crypto, Coinbase wants the SEC to put its cards on the table. Here’s an excerpt from Coinbase’s court filing:
The SEC’s refusal to respond to Coinbase’s rulemaking petition is, in the parlance of the Administrative Procedure Act (APA), “agency action” that has been “unreasonably delayed.” 5 U.S.C. § 706(1). Coinbase brings this mandamus action to compel the SEC to do one simple thing: state on the record whether or not it will initiate proceedings to establish the ground rules that it has charged others and may soon charge Coinbase with failing to follow. The APA requires the Commission to take that simple step.
Moreover, all of the Commission’s actions suggest it has already decided internally to deny Coinbase’s petition, and is simply withholding a formal decision from Coinbase and the public, with the effect (and perhaps intent) of frustrating judicial review. But Coinbase and the crypto industry have an urgent right to a judicially reviewable decision, especially when facing unlawful, arbitrary, and capricious threats of enforcement from the Commission on the very same issue in the interim.
Now that virtual meetings have taken hold at many companies, I’ve feared that annual meeting fanboys (and fangirls) would disappear. But there is at least one teen out there who seems ready to carry on the tradition at her favorite company – even virtually. The WSJ reported on this feel-good story for all the AGM superfans out there:
Cori Borgstadt, the young fan, has become a regular at annual shareholder meetings. In fact, she has attended every annual Disney shareholder confab since 2008, when she was 3 years old. She has asked Mr. Iger a question on all but three occasions, including in 2015, when she wondered what advice he would give to “a kid who wants your job some day.”
Mr. Iger responded, “Well, one thing you can do is keep coming to our shareholders’ meeting.”
Monday will mark Ms. Borgstadt’s 16th straight appearance — this year’s meeting is virtual-only — a streak longer than nearly all of Disney’s directors have been on the company’s board. The shareholder events have allowed Ms. Borgstadt to tap into her obsession with Disney and her interest in corporate governance, while also providing an annual vacation for her family.
While I’m disappointed that it took a WSJ article for me to identify this as a potential hobby to share with my own young kids, I’m going to put an AGM tour on the “family vacation” bucket list. If there are sugary snacks or cartoon-like characters involved, a corporate governance adventure may even be able to top our 2022 visit to the world’s largest ball of twine.
We continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Following that blog an easy way to stay in-the-know on shareholder proposal & engagement trends – and key annual meeting issues – during this critical time of year.
Members can sign up to get that blog pushed out to them via email whenever there is a new post. Here are some of the latest entries:
– E&S Shareholder Proposals: “Quantity Over Quality”
– Institutional Investors: Roundup of Proxy Voting Policy Updates
– Diverging Investor Views: Know Your Base
– Say-on-Climate: Indifference Closely Bordering on Aversion
– No Action Requests: Another Tough Year for Exclusion Efforts
As Meredith recently flagged on our “Proxy Season Blog,” shareholder proposals on workforce diversity disclosures, civil rights audits and other diversity-related topics have continued to proliferate – and have been averaging 44% support over the past few years, according to Morningstar data. However, the additional disclosures that companies are making in response to stakeholder appetite for the information don’t come without risk: this recent report from David Hood at Bloomberg Law says that in the past three years, nearly 40 companies have faced lawsuits over allegedly misleading statements about diversity and equity commitments.
According to David, the plaintiffs’ allegations tend to fall into two main buckets:
– Failing to live up to stated DEI aspirations caused shares to lose value; and
– Disclosed DEI actions were outside the company’s mission to return value to shareholders
The fact that these allegations could in some cases be at odds with each other shows just how carefully you need to handle DEI initiatives and disclosures. The Bloomberg article also notes that this is an active area for employment litigation, with “reverse discrimination” lawsuits getting more attention – which is a topic we discussed last fall at our 1st Annual Practical ESG Conference. Here are a few “risk reduction” takeaways from the article and from Ngozi’s PracticalESG.com blog on “pitfalls to avoid” in DEI training:
1. Consider aspirational policies & statements, rather than strict quotas
2. Encourage DEI trainings – but make them voluntary, frequent, linked to the corporate strategy, expertly facilitated, and digestable
3. Implement initiatives with an eye towards your specific company’s needs. The goal should be to help your employees feel included and empowered to accomplish the company’s mission, not to solve all the problems in the world.
4. Recognize programs and efforts will continue to evolve
When we last checked in on the drama of the Holding Foreign Companies Accountable Act, the PCAOB was striking an optimistic tone on its ability to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong that are auditing China-based companies listed on US exchanges. Last week, the Staff in the SEC’s Division of Corporation Finance and Division of Trading & Markets issued a statement that acknowledged the SEC isn’t currently identifying any more issuers under the HFCAA in light of this accord, and the risk of delisting is paused.
However, the Staff wants to remind everyone that the 174 companies previously conclusively identified under the HFCAA are still subject to additional disclosure requirements. Here are two disclosure-related excerpts from the Staff statement:
All CIIs are listed on the SEC website at www.sec.gov/HFCAA, and each CII must provide certain disclosures to investors and the Commission for each year it is identified as a CII. For foreign issuers that are CIIs, the required disclosures include the percentage of shares owned by foreign government entities, whether government entities in the foreign jurisdiction control the issuer, identification of all Chinese Communist Party (“CCP”) officials who are on the board of the issuer or the operating entity for the issuer, and whether the issuer’s articles of incorporation contain any “charter” of the CCP.
Other Disclosure Obligations for China-based Issuers
In July 2021, Chair Gensler issued a Statement on Investor Protection Related to Recent Developments in China. In that regard, we highlight that China-based issuers should consider their disclosure obligations as a whole, in addition to those disclosures required by the HFCAA and related Commission rules. To that end, we remind issuers that the Division of Corporation Finance has issued a Sample Letter to China-Based Companies, as well as earlier disclosure guidance to China-based issuers. The Division of Corporation Finance will monitor disclosures by China-based issuers and may provide additional guidance to assist these issuers in meeting their disclosure obligations under the federal securities laws.
In addition, the statement reminds companies that they would still be at risk of delisting if the PCAOB issues a new determination about its inspection abilities in a foreign jurisdiction. Moreover, under a Congressional amendment to the HFCAA last December, that delisting timeframe is now shortened to two consecutive years of being considered a “Commission-Identified Issuer” (rather than three). Here’s more detail on that aspect:
We note that the PCAOB could, in the future, make a new determination that it is unable to inspect or investigate completely registered public accounting firms in one or more jurisdictions because of positions taken by a foreign authority. At that time, Commission staff would continue to follow the procedures described in the December 2021 adopting release to identify issuers as CIIs. As noted above, should any issuers be identified as CIIs for two consecutive years in the future, an initial trading prohibition on the issuer’s securities would be imposed. Staff will continue to monitor developments related to the HFCAA, including any changes in PCAOB determinations related to inspections and investigations.
Check out the latest edition of John’s “Timely Takes” Podcast – featuring his interview with Sidley’s Andrea Reed about the hot topic of officer exculpation charter amendments. In this 10-minute episode, John & Andrea discuss:
– Overview of the Delaware statute’s officer exculpation provisions
– Considerations for boards of directors
– Proxy advisors’ response to officer exculpation proposals
– Stockholder support for officer exculpation proposals
These podcasts are built for “smart-phone attention spans” – I’ve been loving them during my commute and they’ve already prevented me from making at least one embarrassing mistake. Make sure to add them to your queue! And if you have insights on a securities law, capital markets or corporate governance trend or development that you’d like to share, John is always on the lookout for guests – just shoot him an email at john@thecorporatecounsel.net.
Thanks to Markel’s Karl Strait for noticing that the SEC’s “Small Entity Compliance Guide” for the new rules on insider trading arrangements and related disclosures confirms the compliance dates for the new exhibit requirement and other disclosures under Regulation S-K Items 408 and 402(x). I blogged earlier this year that Corp Fin Director Erik Gerding had shared thoughts on these dates – but it’s great to see it laid out:
Smaller reporting companies will be required to begin compliance with the:
– Item 408(a) quarterly disclosure and tagging requirements in an Exchange Act report on Form 10-Q that covers the first full fiscal quarter (or on Form 10-K if the first full fiscal quarter is the issuer’s fourth fiscal quarter) that begins on or after October 1, 2023; and
– Item 408(b), Item 402(x), and Item 16J (for foreign private issuers) disclosure and tagging requirements in the annual report on Form 10-K or Form 20-F that covers the first full fiscal year that begins on or after October 1, 2023.
Companies that are not smaller reporting companies will be required to begin compliance with the:
– Item 408(a) quarterly disclosure and tagging requirements in an Exchange Act report on Form 10-Q that covers the first full fiscal quarter (or on Form 10-K if the first full fiscal quarter is the issuer’s fourth fiscal quarter) that begins on or after April 1, 2023; and
– Item 408(b), Item 402(x), and Item 16J (for foreign private issuers) disclosure and tagging requirements in the annual report on Form 10-K or Form 20-F that covers the first full fiscal year that begins on or after April 1, 2023.
Remember that the changes to Section 16 are also now in effect – requiring insiders to report gifts within two business days and indicate on the Form 4 cover page whether the transaction is occurring pursuant to a Rule 10b5-1 plan.
The Guide notes that it was prepared by the Staff as a “small entity compliance guide” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The Guide summarizes and explains rules and form amendments adopted by the Commission, but is not a substitute for any rule or form itself. The Staff wants readers to remember that only the rule or form itself can provide complete and definitive information regarding its requirements.
When it comes to the new disclosure requirements about insider trading, one provision that we keep reading again & again is Item 408(c). I blogged last month about confusion around the type of “non-Rule 10b5-1 trading arrangement” that is outlined in Item 408(c), which triggers the quarterly Item 408(a) disclosure.
The discussion beginning on page 78 of the adopting release says that basically, a non-Rule 10b5-1 plan is a plan that satisfies the old rules for a 10b5-1 plan, but not the new rules. For example, it may not have a cooling-off period. But still, this is an area where folks are continuing to hope for Staff clarification. Here are a few of the head-scratchers that people are grappling with:
– Purchases of issuer stock pursuant to payroll deduction elections (made when there’s not MNPI) under an employee stock purchase plan.
– Purchases of issuer stock pursuant to elections (made when there’s not MNPI) under a 401(k) plan.
– Default net share issuance provisions (in award agreements or equity plans) for vested restricted stock units (not sell-to-cover).
Do these and similar arrangements trigger Item 408(a) disclosure? With the new quarterly disclosure requirement quickly approaching, these are questions we’ll have to figure out very soon!
Check out the January-February issue of The Corporate Counsel newsletter for even more practical guidance on the ins & outs of these new rules. If you don’t already have access to that essential resource, email sales@ccrcorp.com.
