Author Archives: Liz Dunshee

Out of all the types of drama and “client emergencies” that can arise in a securities & corporate governance practice, the release of a short report about your client is one of the most alarming. It can set off a chain reaction in the market and behind closed doors, with everyone wanting quick but thorough answers to legions of questions.

One of the first things the executives and board want to know is, “When is this ordeal going to be behind us?” Unfortunately, the answer for a lot of companies is that it can take a long time – and for some, a full recovery may never arrive. This “ESG Investor” article discusses recent research from a German asset manager about the impact of short seller campaigns. Here’s an excerpt:

The research shows that the gross excess returns of all target companies dropped by about 10% one month after the publication of a negative report. However, small companies’ (those with market capitalisation of less than EUR 5 billion), share prices did not recover within two years of a short campaign, while their larger counterparts staged a comeback.

However, it is worth mentioning that large companies are far from immune from the short selling campaigns. Only those with the shortest memories could forget the Wirecard collapse was a direct result of Viceroy Research’s investigation into widespread fraud at the German payment service provider.

Cyclical companies were also found to be more vulnerable to short seller activism. While targets from defensive sectors recovered after just one month, the downturn in cyclical stocks continued for up to 18 months after publication of the respective reports. The most frequently affected sectors were technology (27% of cases), consumer discretionary (17%) and financials (12%).

The report’s author says that cyclical sectors were targeted in 75% of the cases he looked at. He suggests that because those companies are under more pressure to meet expectations at a particular time, they’re more vulnerable to accusations of fraud. He also predicts that short seller targeting could come to the “E&S” space over time, as claims on those topics become more linked to stock price and regulatory compliance.

– Liz Dunshee

I blogged last month that the SEC has been considering a big EDGAR upgrade. On Monday, they’re making some changes to technology that is probably related to this upgrade and could affect some filing software. Alan Dye blogged this about it yesterday on Section16.net:

The SEC announced last week that it is implementing security-enhancing changes to its three EDGAR filing websites (including the “Ownership Forms” website for filing Forms 3, 4 and 5) which may require changes to third-party filing software. In a nutshell, the SEC is changing the way EDGAR communicates with filing software. Here’s an excerpt:

Specifically, EDGAR will create a unique parameter that some third-party software products may need to include with every request that enters/updates information. EDGAR will verify the parameter and terminate the user session if the parameter is missing or mismatched.

The SEC plans to implement the new measures on Monday, November 22. While most current software should be compatible with the new update, you should check with your filing agent if you have any questions. All filers, regardless of the software they use, should also be prepared for potential submission delays or rejections – there are usually glitches that need to be ironed out any time the SEC makes a software change.

For those who use the Romeo & Dye Filer, the desktop version of the Filer may not be compatible with the new system, which means filings can be created but then will need to be manually filed through EDGAR on the SEC website. Those still using the desktop version should consider migrating to the online version as soon as possible to avoid any last-minute transition difficulties. The web-based filing platform is up to date. CCRcorp’s member services team can help with migration if you email them at info@ccrcorp.com.

– Liz Dunshee

We’ve posted the transcript for our recent webcast for members, “Investment Stewardship: Understanding the ‘New Era’ of Expectations and Engagement.” Davis Polk’s Ning Chiu led a great discussion amongst Donna Anderson of T. Rowe Price, Michelle Edkins of BlackRock and Caitlin McSherry of Neuberger Berman about how investment stewardship teams operate, engagement do’s & don’ts, and more.

– Liz Dunshee

Yesterday, the SEC announced that it had adopted final rules that will require parties to proxy contests to use “universal” proxy cards that list all director nominees who are being presented for election. The rules also create new requirements for all director elections (including uncontested elections) – because they mandate that “against” and “abstain” voting options be provided on a proxy card where the options have legal effect under state law, and they require disclosure in the proxy statement about the effect of all voting options that are provided. All of this goes into effect for elections held after August 31, 2022.

The Commissioners adopted the rule at an open meeting by a rare 4-1 vote, with Commissioners Lee and Crenshaw issuing statements in full support of the rule, Commissioner Roisman supporting adoption but suggesting that the Commission consider in the future whether to impose additional eligibility criteria on dissidents launching campaigns and expressing reservations about the power that the rule could give to proxy advisors, and Commissioner Peirce dissenting. The Council of Institutional Investors issued a press release applauding the rule.

The SEC’s Fact Sheet summarizes the high points of the 197-page adopting release. To understand what this actually means for companies, though, you’ll want to read this Sidley memo – which predicts a “significant increase in proxy contest threats” once the rules go into effect. Here’s an excerpt:

While comparable to the vacated Rule 14a-11, which allowed shareholders holding at least 3% of the shares for three years to put dissident directors on the company’s proxy statement, the Universal Proxy Rules confer substantially more significant rights to shareholders without any minimum ownership requirements (i.e., owning only one share for one minute will be sufficient). While this was a concern voiced by several Commissioners, the SEC eventually went ahead with the adoption of the Universal Proxy Rules. The new rules will reshape the process by which hostile bidders, activist hedge funds, social and environmental activists, and other dissident shareholders may utilize director elections to influence control and policy at public companies.

As the rules will dramatically change the methods by which proxy contests at public companies have been conducted for decades, this Update summarizes the principal mechanics of the Universal Proxy Rules and the implications of the rules for public companies.

For more of this saga’s backstory, check out my blog from last spring when the SEC re-opened the comment period for these rules and my summary of themes from notable comment letters. We’ll be posting the avalanche of memos in our “Proxy Cards” Practice Area.

– Liz Dunshee

Yesterday, by a 3-2 vote of the Commissioners, the SEC approved a 71-page rule proposal on proxy voting advice that would unwind two parts of the “proxy advisor” rules adopted in mid-2020. Those rules were intended to give companies more of an opportunity to review & respond to proxy advisors’ voting recommendations & reports. They were a long time coming and were widely celebrated by many folks on the corporate side – although there were also some questions about how the new processes would affect proxy season timetables and voting behaviors. Yesterday’s action was criticized by the US Chamber of Commerce, as well as by Commissioner Peirce and Commissioner Roisman. Meanwhile, Commissioner Lee and Commissioner Crenshaw issued statements in support of the proposal.

The new proposal does not come as a huge surprise in light of SEC Chair Gary Gensler’s directive earlier this year to reconsider and refrain from enforcing the rules, which had been scheduled to go into effect December 1st. One of the reasons the SEC says that it has changed course is because of the industry’s effort to “self-regulate” through the “Best Practice Principles,” which I’ve written about a few times. Anyway, here’s an excerpt from the SEC’s Fact Sheet that explains the impact this new proposal will have if adopted:

Proxy Rule Exemptions for Proxy Voting Advice

The 2020 rules added conditions in Rule 14a-2(b)(9)(ii) to exemptions from the proxy rules’ information and filing requirements that proxy advisory firms often rely on. First, those conditions require proxy advisory firms to make their advice available to the companies that are the subject of their advice at or before the time that they make the advice available to their clients. Second, the conditions require proxy advisory firms to provide their clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding the proxy advisory firms’ proxy voting advice by registrants who are the subject of the advice.

Investors and others have expressed concerns that those conditions will impose increased compliance costs on proxy advisory firms and impair the independence of their proxy voting advice. The proposed amendments address those concerns by rescinding Rule 14a-2(b)(9)(ii) as well as the related safe harbors and exclusions from those conditions.

Liability Rule for Proxy Voting Advice

The 2020 rules also amended Rule 14a-9, which prohibits false or misleading statements, to add Note (e), which sets forth examples of material misstatements or omissions related to proxy voting advice. Specifically, Note (e) provides that the failure to disclose material information regarding proxy voting advice could be misleading.

Investors and others have expressed concerns that Note (e) may increase proxy advisory firms’ litigation risks, which could impair the independence and quality of their proxy voting advice. The proposed amendments would rescind Note (e) to Rule 14a-9 while affirming that the rule applies to material misstatements of facts contained in proxy voting advice. The proposing release also presents Commission guidance regarding the application of Rule 14a-9 to statements of opinion contained in proxy voting advice.

The comment period will be open for 30 days after the proposed amendments are published in the Federal Register. We’ll be posting memos in our “Proxy Advisors” Practice Area. Now, I just need to revisit the latest edits to our “Proxy Advisors” Handbook and plan to undo a bunch of them…

– Liz Dunshee

FASB recently announced that it has proposed an Accounting Standards Update for interim disclosure requirements (Topic 270), which would add to GAAP a requirement to disclose when a “significant transaction or event has occurred since the prior year-end that has had a material effect on an entity.” That disclosure previously was required by Regulation S-X Rule 10-01 – but was axed as part of the SEC’s “disclosure simplification” back in 2018. Although this wasn’t one of the specific items that the SEC had asked FASB to consider incorporating into GAAP, it is part of FASB’s ongoing disclosure framework project.

This “Jim Hamilton” blog highlights key points about the 113-page proposal. Here are a few excerpts:

Assessing materiality. In addition to reintroducing the disclosure requirement for significant events with a material effect on a company, FASB proposed to eliminate the phrase “at minimum” and add language to Topic 270 to encourage entities to exercise discretion when considering interim reporting disclosures. FASB also proposed to clarify that assessing materiality is appropriate for entities when evaluating disclosure requirements, and that assessing which disclosures to provide at interim periods involves considering information provided at the previous annual period.

Other amendments. FASB’s proposals include an update that would require that an entity refer a reader of interim financial statements and notes to the previous annual financial statements when providing condensed financial statements or limited notes. The proposed amendments would require, if applicable, that the reporting entity explain that the interim results may not be indicative of the annual results or that adjustments have been made to the period to provide a more relevant depiction of the entity’s results.

With regard to providing comparative disclosures, the proposed amendments would clarify when comparative disclosures are required. The amendments also would remove phrases such as “for each period presented” and instead refer to making comparative disclosures when comparative statements are presented.

Stakeholder feedback. FASB requested that comments be provided by the end of January 2022.

– Liz Dunshee

In another sign that proxy season will be here before we know it, Glass Lewis announced this week that it has released its 2022 Proxy Voting Policy Guidelines. These Guidelines address how the proxy advisor approaches matters that affect votes on director elections, auditor ratification, executive pay, and governance structures.

As always, the first few pages of the Guidelines summarize the policy changes. Here are the main ones:

Board Gender Diversity: The policies remind boards that beginning in 2022, Glass Lewis will generally recommend voting against the chair of the nominating committee of a board with fewer than two gender diverse directors, or the entire nominating committee of a board with no gender diverse directors, at companies within the Russell 3000 index.

Beginning with shareholder meetings held after January 1, 2023, Glass Lewis will transition from a fixed numerical approach to a percentage-based approach and will generally recommend voting against the nominating committee chair of a board that is not at least 30 percent gender diverse at companies within the Russell 3000 index.

The policies clarify that when making these voting recommendations, Glass Lewis will carefully review a company’s disclosure of its diversity considerations and may refrain from recommending that shareholders vote against directors of companies when boards have provided a sufficient rationale or plan to address the lack of diversity on the board.

It has also replaced references in the guidelines to female directors with “gender diverse directors,” defined as women and directors that identify with a gender other than male or female.

Interplay With Other Diversity Regulations: The policies address evolving state laws and stock exchange requirements on gender diversity and underrepresented community diversity. Glass Lewis will recommend in accordance with mandated board composition requirements of applicable laws and regulations when they come into effect.

For annual meetings of applicable Nasdaq-listed companies that are held after August 8, 2022, Glass Lewis will recommend voting against the chair of the governance committee when the required board diversity disclosure has not been provided.

Glass Lewis will generally refrain from recommending against directors when applicable state laws do not mandate board composition requirements, are non-binding, or solely impose disclosure or reporting requirements in filings made with each respective state annually.

Disclosure of Director Diversity & Skills: Beginning in 2022, for companies in the S&P 500 index with particularly poor disclosure (i.e., those failing to provide any disclosure in each of the tracked categories), Glass Lewis may recommend voting against the chair of the nominating and/or governance committee. Beginning in 2023, when companies in the S&P 500 index have not provided any disclosure of individual or aggregate racial/ethnic minority demographic information, Glass Lewis will generally recommend voting against the chair of the governance committee.

E&S Risk Oversight: Beginning in 2022, Glass Lewis will note as a concern when boards of companies in the Russell 1000 index do not provide clear disclosure concerning the board-level oversight afforded to environmental and/or social issues. For shareholder meetings held after January 1, 2022, it will generally recommend voting against the governance committee chair of a company in the S&P 500 index who fails to provide explicit disclosure concerning the board’s role in overseeing these issues.

While Glass Lewis believes that it is important that these issues are overseen at the board level and that shareholders are afforded meaningful disclosure of these oversight responsibilities, it believes that companies should determine the best structure for this oversight. In Glass Lewis’s view, this oversight can be effectively conducted by specific directors, the entire board, a separate committee, or combined with the responsibilities of a key committee.

Role of a Committee Chair: Glass Lewis has revised its approach to the role of a committee chair in cases where there is a designated committee chair and the recommendation is to vote against the committee chair, but the chair is not up for election because the board is staggered. Beginning in 2022, in cases where the committee chair is not up for election due to a staggered board, and where Glass Lewis has identified multiple concerns, it will generally recommend voting against other members of the committee who are up for election, on a case-by-case basis.

Multi-Class Share Structures: Beginning in 2022, Glass Lewis will recommend voting against the chair of the governance committee at companies with a multi-class share structure and unequal voting rights when the company does not provide for a reasonable sunset of the multi-class share structure (generally seven years or less).

Governance Following a SPAC Combination: In cases where Glass Lewis determines that the company has adopted overly restrictive governing documents, where, preceding the company becoming publicly traded, the board adopts a multi-class share structure where voting rights are not aligned with economic interest, or an anti-takeover provision, such as a poison pill or classified board, it will generally recommend voting against all members of the board who served at the time of the company becoming publicly traded if the board hasn’t obtained or committed to get shareholder approval or provide for a reasonable sunset provision.

Director Commitments of SPAC Executives: Given the nature of executive roles at SPACs and the limited business operations of SPACs, when a directors’ only executive role is at a SPAC, we will generally apply our higher limit for company directorships. As a result, we generally recommend that shareholders vote against a director who serves in an executive role only at a SPAC while serving on more than five public company boards.

Waiver of Age & Tenure Policies: Beginning in 2022, in cases where the board has waived its term/age limits for two or more consecutive years, Glass Lewis will generally recommend shareholders vote against the nominating and or governance committee chair, unless a compelling rationale is provided for why the board is proposing to waive this rule, such as consummation of a corporate transaction.

Glass Lewis also clarified policies on its ESG approach (noting it looks at issues through the lens of a long-term shareholder), its case-by-case evaluation of shareholder proposals, preferred stock increases, exclusive forum provisions, post-IPO governance, director independence, related party transactions, and E&S metrics in executive pay and other executive pay-related issues (see Emily’s blog on CompensationStandards.com).

We’ll be posting memos in our “Proxy Advisors” Practice Area.

– Liz Dunshee

In addition to updating its voting guidelines for director elections and other more standard proxy statement proposals, Glass Lewis also updated its separate Policy Guidelines on ESG Initiatives, which now stands at 40 pages. These Guidelines identify factors Glass Lewis considers when making its case-by-case recommendations on shareholder proposals and related initiatives. Here’s a summary of this year’s changes:

Environmental and Social Risk Oversight: Glass Lewis clarified the factors it considers when evaluating companies’ board-level oversight of ESG-related matters. It also clarified its approach to holding directors accountable for ESG-related risks.

Say on Climate: Glass Lewis clarified its approach to management proposals asking shareholders to approve climate transition plans as well as shareholder proposals asking companies to adopt such a vote. Glass Lewis maintains concerns relating to the Say on Climate vote on the basis of shareholders approving a company’s business strategy, particularly given that sufficient information to fully evaluate the plan is often not available to shareholders. Accordingly, Glass Lewis will generally oppose shareholder proposals requesting that companies adopt a Say on Climate vote.

However, when companies have adopted such a vote, and are asking shareholders to weigh in on their climate-related strategies, Glass Lewis will evaluate companies’ climate transition plans on a case-by-case basis. In its evaluation, it will consider companies’ disclosure of the board’s role in setting company strategy in the context of the Say on Climate vote as well as disclosure on how the board intends to interpret the vote results and its engagement with shareholders on the issue. In addition, Glass Lewis will evaluate each climate transition plan in the context of each companies’ unique operations and risk profile.

Updates: Glass Lewis removed guidelines referencing the MacBride Principles, Genetically Modified Organisms, and Sustainable Forestry, as there have not been shareholder proposals on these topics in a number of years. Should proposals on these topics begin to be submitted to shareholder votes in the future, it will likely reincorporate its views on these proposals into future versions of these guidelines.

Written Consent: Glass Lewis codified its approach to shareholder proposals requesting that companies lower the threshold required to initiate written consent. When evaluating these proposals, it will generally recommend in favor of lowering the ownership threshold when the company has no special meeting provision, or only allows shareholders owning more than 15% of its shares the ability to call a special meeting. It will generally oppose lowering the ownership threshold necessary to initiate written consent if the company in question has a 15% or lower special meeting threshold.

– Liz Dunshee

The holiday season is barrelling towards us and many of us are daring to envision gatherings outside our own homes. But when it comes to the stock market’s New Year celebration, this year’s calendar gives no rest for the weary.

Even though Friday, December 31st is a federal holiday – meaning the SEC & Edgar are closed – the stock market is open for a full trading day that day. So, there’s extra time for something to go sideways, or at the very least for some insiders to squeeze in last minute trades (if they lack MNPI and/or are relying on a valid Rule 10b5-1 trading plan!). The market and the SEC are also open for business on Monday, January 3rd. The NYSE calendar explains that no New Year holiday will be observed by the Exchange this year because of Rule 7.2, which says in part:

When a holiday observed by the Exchange falls on a Saturday, the Exchange will not be open for business on the preceding Friday and when any holiday observed by the Exchange falls on a Sunday, the Exchange will not be open for business on the succeeding Monday, unless unusual business conditions exist, such as the ending of a monthly or yearly accounting period.

This Bloomberg article says the non-holiday is going to surprise some folks, because this is the first time in 11 years that Rule 7.2 has snatched away a day off. Here’s more detail:

While the exchange published its holiday schedule a long time ago, complete with a “—*” footnote under the New Year’s Day 2022 column, some market participants are only now realizing they’re getting stiffed on the holiday. Adding salt to the wounds, bond traders get to start their New Year’s Eve parties a little earlier: Sifma is calling for a 2 p.m. market close that day.

– Liz Dunshee

A coalition of UK-based investors representing $4.5 trillion recently announced – just ahead of the COP26 summit – that it had sent letters to PwC, Deloitte, KPMG and EY that escalate a years-long engagement about reflecting climate change risks in financial statements. Each letter starts off like this:

Many of us wrote in January 2019 seeking assurance that [audit firm] was integrating material climate risks into its audits wherever relevant. Specifically, we asked that [you] alert shareholders where company accounts were not considering the financial implications of either the current decarbonisation pathway, or the global transition onto a 1.5C pathway . We are writing again now as an even larger group of investors following analysis of carbon-intensive companies’ financial statements published by Carbon Tracker, which details the broad failure of both directors and auditors to act on our expectations. We would like to understand what you plan to do to address these weaknesses in [audit firm’s] audit process.

The body of the letter contains details about the particular firm’s audits, and then it goes on to threaten action at upcoming annual meetings:

We began our engagement with you almost three years ago. We cannot afford to wait another three years for [audit firm] to act. From next voting season, you should increasingly expect to see investors vote against [audit firm’s] reappointment as auditor where you fail to meet the expectations we have clearly set out in our previous correspondence, the November 2020 IIGCC paper and underlined again here.

It remains to be seen whether this shaming endeavor will spur the Big 4 to take any actions that they aren’t already taking, and whether this is a bellwether for US expectations. As Lawrence blogged earlier this year, PwC announced that it’s investing $12 billion and planning a 100,000 increase in headcount relating to ESG work. The whole industry is gearing up for what they clearly expect to be in-demand work.

With those wheels already in motion, this threat really just underscores that in the future, the Big 4 may be competing with each other on ESG expertise (or more accurately, their ability to market their ESG expertise). It’s pretty unlikely that all of the big firms will suffer a string of low votes that send huge companies to move their work to smaller firms, and that’s probably not exactly the outcome that the investors want either. But as Lawrence has written, tracking ESG progress and accurately validating ESG data will also require more than a focus on financial audits. A few places are recognizing that – here’s one that’s hiring.

– Liz Dunshee