Boards are certainly not lacking on “data” these days. In fact, one of the most challenging aspects of working with boards right now is sorting through all the possible information & data points in order to pinpoint what is actually helpful and decision useful. Despite all the blood, sweat & tears that go into preparing board materials, I recently heard one director share that he felt he was “wading through mud.” So, it sounds like there’s still room for improvement.
This report from Board Intelligence and NACD shares practical ideas for striking the right balance between context & information overload, and between reviewing the last quarter’s corporate performance & considering what’s ahead. Here are the top 3 “board pack critical thinking gaps,” according to directors:
1. Too operational at the expense of strategy
2. Too internally focused, with little insight into the wider market
3. Light on the implications of the information presented
To close those gaps, the report recommends asking these questions about the board materials before they go out:
– Does each report address the key questions that are on directors’ minds?
– Do reports provide a balanced analysis, giving a forward-looking view as well as looking backward, and considering the internal and external context?
– Does management offer actionable insights by answering two key questions in their reports: “What are the implications?” and “What will we stop, start, or do differently as a result?”
– If management is using slides to share information, are those slides sufficiently detailed or accompanied by a memo so they can be easily understood without a voice-over?
– Is each report tailored to the board’s specific needs and sufficiently strategic?
– Is the board pack shared in a timely manner to allow sufficient review and meeting preparation?
– Liz Dunshee
In the latest 20-minute episode of the “Women Governance Trailblazers” podcast, Courtney Kamlet and I talked with Niamh Corbett, who is Head of Americas for Board Intelligence. We discussed:
1. Niamh’s career path, from investment banking to Board Intelligence commercial roles and national thought leadership.
2. Top trends in board communication and advice on how boards can be most effective.
3. Similarities and differences between the U.K. and U.S. on board reporting and corporate governance, including stances on diversity and inclusion.
4. The biggest risks and opportunities for today’s boards of directors.
5. What governance practitioners should be thinking about in the U.S. deregulatory environment.
To listen to any of our prior episodes of Women Governance Trailblazers, 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
If you work with life sciences companies, you know that clinical data developments and releases do not always fit neatly into SEC disclosure and fundraising rules. Two recent Fenwick memos give must-read roadmaps on these topics. Here are a couple of disclosure considerations (also read this fundraising / IR piece):
What if data are expected around the time of a Form 10-K or Form 10-Q filing or a planned investor meeting?
If the company has undisclosed topline clinical data when filing an Annual Report on Form 10-K or a Quarterly Report on Form 10-Q, it generally must disclose those data in the filing.
To avoid issues, you can either advance the Form 10-Q filing to a date before the company receives the data or delay the data receipt until after the scheduled filing.
Once the CEO or any other key executives who regularly engage with investors are aware of the data, they should stop all discussions with investors prior to disclosure.
Does the four business day reporting deadline for Form 8-K apply to topline clinical data releases?
No. A span of six to seven days from the point of receiving the data to public release is typical, however, more rapid disclosure may be necessary with negative results. Additionally, there may be other important timing considerations if the data are expected to support a financing for the company. A proactive legal strategy includes early discussion of the preferred release time with your investor relations team.
The memo also covers special blackouts, conference presentations, and more. Given these complexities, it’s smart to think ahead. The Fenwick team outlines how to prepare in advance:
When should I start preparing for disclosure?
Preparations can often begin several months in advance. Once a calendar is set for planned readout dates, establish a strong communication channel with the clinical team working on the trial readout, your investor relations team and your legal team. Make sure that you understand the basics—the trial structure, when the data are planned to arrive, and what data are anticipated. This will help you evaluate regulatory risks and necessary disclosures while setting expectations for the internal and external flow of information. Having a communications plan in place early can also be helpful if it becomes necessary to disclose data early (e.g., if there is a safety signal necessitating early unblinding or trial termination).
What can I prepare in advance?
It can help to develop a detailed day-by-day task plan. This plan should include proposed tasks from the moment the data arrives at the company for processing and reviewing, right up to the date of disclosure, and even beyond. This approach also helps solidify your position as a crucial participant in decisions about data timing and provides structure for the internal dissemination of data during the pre-public release phase.
Collaborate with the cross-functional team responsible for managing the data release to create core forms of press releases, corporate presentation slides and other supplementary items, such as a preliminary Q&A.
Establishing a structured timeline can be instrumental in ensuring everyone is aligned on key disclosure dates, the availability of key stakeholders, and assessing potential training needs in advance of receiving data.
– Liz Dunshee
Check out our latest 26-minute episode of the “Timely Takes” podcast – diving into Staff Legal Bulletin No. 14M. Meredith caught up with MoFo’s Ryan Adams to discuss:
1. Background on rescinded SLB 14L
2. The “ordinary business,” “micromanagement” and “economic relevance” bases for exclusion following SLB 14M
3. Whether companies will continue to submit a “board analysis”
4. The significance of SLB 14M’s note that the 2022 proposed amendments to the “substantial
implementation,” “duplication” and “resubmission” bases for exclusion under 14a-8 have not been adopted
5. SLB 14M’s guidance on proof of ownership and deficiency letters
6. What the timing of SLB 14M means for companies as they navigate this shareholder proposal season
If you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share, email John at john@thecorporatecounsel.net or Meredith at mervine@ccrcorp.com.
– Liz Dunshee
Here’s something that Meredith blogged Friday over on DealLawyers.com: Yesterday, Corp Fin released an updated version of Securities Act Sections CDI 239.13 and Securities Act Forms CDI 225.10 governing the use of Form S-4/F-4 to register offers and sales of a buyer’s securities after it has obtained “lock-up” commitments from target insiders to vote in favor of the transaction. The CDI permitted registration in certain circumstances but noted that the Staff has objected to the subsequent registration of offers and sales to any of the target shareholders where the insiders also previously executed consents approving the deal – because it viewed the offer and sale as already completed privately.
Now, as you can see from the redline, the CDI provides that the Staff will not object to the subsequent registration on Form S-4/F-4 where the target company insiders also deliver written consents, as long as (1) those insiders will be offered and sold securities of the acquiring company only in an offering made pursuant to a valid Securities Act exemption and (2) the registered securities will be offered and sold only to target company shareholders who did not deliver written consents.
At the same time, Corp Fin also released five new Tender Offer Rules and Schedules CDIs (101.17 through 101.21), adding to the 34 CDIs released in March 2023. The five new CDIs address the “general rule” that an offer should remain open for at least five business days after a material change is first disclosed and clarify the Staff’s views regarding when a change related to financing and funding conditions constitutes a “material change.” For example, to paraphrase three of the CDIs:
– CDI 101.18 clarifies that the Staff views a subsequent securing of committed financing to be a material change where an offeror had commenced an all-cash tender offer without sufficient funds or committed financing. The CDI details steps the offeror must take in that situation.
– On the other hand, CDI 101.20 and 101.21 clarify that the Staff does not view either the substitution of a funding source or the actual receipt of the funds from the lender when the offeror had already obtained (and disclosed) a binding commitment letter to be a material change. The CDIs address disclosure considerations for these situations and where the lender does not fulfill its obligation to provide the funds.
Check out our DealLawyers.com site for more information – we’re posting memos in the “Tender Offers” Practice Area.
– Liz Dunshee
Earlier this week, an Executive Order directed Attorney General Pam Bondi to pause DOJ enforcement of the Foreign Corrupt Practices Act for 180 days. Here’s more detail from the fact sheet:
The Order directs the Attorney General to pause FCPA actions until she issues revised FCPA enforcement guidance that promotes American competitiveness and efficient use of federal law enforcement resources.
– Past and existing FCPA actions will be reviewed.
– Future FCPA investigations and enforcement actions will be governed by this new guidance and must be approved by the Attorney General.
The Order implies that the new enforcement guidance will give U.S. companies more leeway with their global business practices. But before you get carried away with bribing foreign officials, it’s important to keep in mind that – at least for now – the SEC still has power to bring civil enforcement actions for FCPA-related violations. This Cleary Gottlieb memo gives more color on how that could play out:
It remains to be seen whether, once confirmed, Atkins will bring the SEC’s enforcement policy in-line with the DOJ’s. The SEC, which enforces the FCPA only on U.S. and foreign issuers of U.S. securities, will also need to consider the impact on investors of pausing enforcement wholesale.
In particular, the SEC enforces the books and records and internal controls provisions of the FCPA, which are codified as part of the Securities and Exchange Act, against numerous companies both inside and outside of the FCPA context to ensure that issuers have accurate books and records and reasonable internal controls over financial accounting, regardless of whether evidence of corrupt payments is established.
According to the memo, the Executive Order and a related DOJ memo create a number of open questions – and that’s part of the reason companies will still benefit from maintaining their anti-corruption compliance programs during this pause and beyond. A memo from BakerHostetler summarizes why FCPA still matters:
■ Foreign and Regulatory Anticorruption Regimes Remain Unaffected. Foreign anticorruption architecture and FCPA analogs in the UK, the EU and other major economies remain in place. The executive order also does not impact the Securities and Exchange Commission’s (SEC) FCPA civil enforcement programs, which include a robust and successful whistleblower program. Companies will still be subject to these laws and regulations.
■ Bribery Impacts the Bottom Line. Bribery often causes companies to lose money through slush funds and other undocumented expenditures that cannot be internally tracked or audited. Indeed, prior FCPA cases, such as the recent trial in United States v. Aguilar in the Eastern District of New York, show that executives may embezzle money in tandem with bribery schemes.
■ FCPA Enforcement will be Decentralized. Bondi’s memorandum lessens the gatekeeping function over FCPA cases related to cartels and TCOs and gives more autonomy to United States Attorney’s Offices (USAOs) around the country, which might undermine prior goals of consistency. While the character of FCPA cases may change, this reduced DOJ oversight and new independence for USAOs could increase overall FCPA enforcement. However, it could also lead to more inconsistent and less predictable enforcement, requiring businesses to maintain comprehensive and flexible FCPA compliance policies — especially with respect to prosecution of companies/individuals that could be considered to be aiding or transacting with cartels or TCOs as described above.
■ Other Statutes Remain Applicable. Statutes for crimes such as wire fraud and money laundering can be used in traditional FCPA fact patterns and support criminal enforcement. The False Claims Act can be used similarly in civil cases.
■ DOJ May Revisit Past Conduct. After the review period mentioned in the executive order, the Attorney General is authorized to “determine whether additional actions, including remedial measures with respect to inappropriate past FCPA investigations and enforcement actions, are warranted” and to “take any such appropriate actions.” This leaves the door open for a reexamination of past FCPA-related investigations or conduct. Companies that relax their FCPA compliance policies may find themselves vulnerable to later enforcement actions. This may be especially so with foreign companies, given President Trump’s comments about the unfair impact to date on U.S. entities.
Also see this White & Case memo, which predicts foreign companies will be at greater risk once FCPA enforcement comes back online – and check out other analysis in our “Foreign Corrupt Practices Act” Practice Area.
We are also posting memos about all of the Executive Orders and transition issues in our “Regulatory Reform” Practice Area!
– Liz Dunshee
If you’re looking for a good resource to anticipate “macro-level” questions your directors might ask you in the coming year (in addition to new regulatory reforms), Cleary Gottlieb is out with its “Selected Issues for Boards of Directors in 2025.” This year’s edition covers 13 topics over the course of 74 pages – ranging from AI, non-competes, tax risks, trade controls, disclosures about executive security and equity grant policies, enforcement, shareholder activism, Delaware issues, UK & EU capital markets, and more.
On the topic of cyber disclosures, some people are wondering whether companies will be getting more of a pass under the new regime. Earlier this week, Acting SEC Chair Mark Uyeda reiterated previous arguments against the SEC’s climate disclosure rule when directing a pause in the agency’s defense of that rule. Similar to the climate disclosure rule, Commissioner Uyeda – as well as Commissioner Hester Peirce criticized the SEC’s decision to adopt the cyber disclosure rules – and both Commissioners have also dissented from some recent cyber-related SEC enforcement actions. Unlike climate disclosure, though, the cyber disclosure rules aren’t being challenged in court. And the Cleary team suggests that although the SEC enforcement environment may shift, companies should still pay attention to how their cybersecurity risks and processes are described in public disclosures. Here’s an excerpt:
Looking to the future, the recent dissents by the Republican Commissioners indicate a likelihood of agency focus shifting to a less granular concept of materiality in disclosures. We expect the SEC will focus on situations like that in Flagstar, where there is potential for investor harm, rather than dissecting post-incident reports and company processes.
That being said, under the last Trump Administration, the SEC brought a number of blockbuster cyber incident disclosure cases against Yahoo and others, which, combined with the new rules, behooves registrants to pay attention to disclosure and related policies and procedures.
The Flagstar settlement – which the SEC announced in mid-December – involved alleged materially misleading statements about a breach. Specifically, the SEC’s order said:
This matter concerns materially misleading statements that Flagstar negligently made regarding a cybersecurity attack on Flagstar’s network between November 22, 2021 and December 25, 2021 (the “Citrix Breach”), which resulted in, among other things, the encryption of data, network disruptions, and the exfiltration of the personally identifiable information (“PII”) of approximately 1.5 million individuals, including customers, on December 3 and 4, 2021. The risk factors in Flagstar’s 2021 Form 10-K, which it filed on March 1, 2022, stated that cybersecurity attacks “may interrupt our business or compromise the sensitive data of our customers,” but Flagstar did not disclose that Flagstar had already experienced cybersecurity attacks that resulted in the exfiltration of sensitive customer data and that the Citrix Breach interrupted its business.
In a June 17, 2022 notice to customers posted on its website (“Customer Website Notice”) and a Form 10-Q filed on August 9, 2022, Flagstar also made materially misleading statements concerning the scope of the Citrix Breach and represented that there was unauthorized “access” to its network and customer data, when Flagstar was aware that the breach disrupted several of its network systems and that customer PII was exfiltrated from its network. Flagstar also failed to maintain disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
It’s worth noting that Commissioner Uyeda did not vote in favor of the order, and that Commissioner Peirce approved it with exception as to the Rule 13a-5 charge and the penalty.
If you’re covering cyber issues with your board, my blog from last month on putting board oversight of cybersecurity into action might also be helpful.
– Liz Dunshee
In the latest episode of our “Women Governance Trailblazers” podcast, Courtney Kamlet and I interviewed Lucy Fato, who is currently EVP, General Counsel & Corporate Secretary of Seaport Entertainment Group. People who have been in the corporate governance space for a while probably know Lucy – she’s held prominent roles at AIG and other notable companies, and started out at Davis Polk. We discussed:
1. Lucy’s career path and things that have surprised her along the way.
2. Transitioning from private practice to an in-house role, considerations for legal-adjacent roles and prerequisites to being a leading GC.
3. Behaviors and actions that allow General Counsels to support a culture of ethics & compliance while still being seen as a valuable business partner.
4. Advice for companies that want to give back to communities when there is a risk of backlash.
5. What Lucy thinks women in the corporate governance field can add to the current conversation on the societal role of companies.
To listen to any of our prior episodes of Women Governance Trailblazers, 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.
Programming Note: In observance of Presidents Day, we will not be publishing blogs on Monday. We’ll return Tuesday.
– Liz Dunshee
Yesterday, the Corp Fin Staff published Staff Legal Bulletin 14M. SLB 14M addresses various aspects of the Rule 14-8 shareholder proposal process, but most significantly it rescinds SLB 14L – which was published in 2021 and had made it easier for proponents to put environmental & social proposals to a vote. Now, we hopefully are returning to more of a middle ground. Here’s an excerpt from the new SLB:
[I]t is the staff’s view that a “case-by-case” consideration of a particular company’s facts and circumstances is a key factor in the analysis of shareholder proposals that raise significant policy issues. In addition, the text of Rule 14a-8(i)(5) references the relationship of the proposal to the individual company, requiring analysis of whether the proposal is “significantly related to the company’s business.”
Accordingly, where relevant to the arguments raised to the staff by companies and proponents, the staff will consider whether a proposal is otherwise significantly related to a particular company’s business, in the case of Rule 14a-8(i)(5), or focuses on a significant policy issue that has a sufficient nexus to a particular company, in the case of Rule 14a-8(i)(7). Our views on the application of both rules are described below.
As usual, the SLB contains the disclaimer that the bulletin is not a rule, regulation, or statement of the Commission, it has not been approved or disapproved by the Commission, and it does not alter or amend applicable law or create new or additional obligations for any person. (That’s important because the Government Accountability Office said a couple of years ago that Bulletins are rules that must be submitted to Congress.) But “rule” or “no rule,” these SLBs tend to inform the (informal, non-binding) no-action process that applies to a company’s decision to exclude a Rule 14a-8 shareholder proposal from its proxy statement. We all pay attention when a new one arrives – and when an old one is put out to pasture.
As a reminder, here’s the text of Rule 14a-8(i)(5) and (i)(7):
– Rule 14a-8(i)(5) – the “economic relevance” exclusion – which permits exclusion of a proposal if it relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business, and
– Rule 14a-8(i)(7) – the “ordinary business” exclusion – which permits exclusion if the proposal deals with a matter relating to the company’s ordinary business operations
Here’s the now-current approach to the “economic relevance” exclusion under SLB 14M :
The Division’s analysis will focus on a proposal’s significance to the company’s business when it otherwise relates to operations that account for less than 5% of total assets, net earnings and gross sales. Under this framework, proposals that raise issues of social or ethical significance may be excludable, notwithstanding their importance in the abstract, based on the application and analysis of each of the factors of Rule 14a-8(i)(5) in determining the proposal’s relevance to the company’s business.[8]
Because the rule allows exclusion only when the matter is not “otherwise significantly related to the company,” we view the analysis as dependent upon the particular circumstances of the company to which the proposal is submitted. That is, a matter significant to one company may not be significant to another. On the other hand, we would generally view substantive governance matters to be significantly related to almost all companies.
Where a proposal’s significance to a company’s business is not apparent on its face, the Commission has stated that a proposal may be excludable unless the proponent demonstrates that it is “otherwise significantly related to the company’s business.”[9] For example, as the Commission has stated, the proponent can provide information demonstrating that the proposal “may have a significant impact on other segments of the issuer’s business or subject the issuer to significant contingent liabilities.”[10] The proponent could continue to raise social or ethical issues in its arguments, but in accordance with these Commission statements it would need to tie those matters to a significant effect on the company’s business. The mere possibility of reputational or economic harm alone will not demonstrate that a proposal is “otherwise significantly related to the company’s business.” In evaluating whether a proposal is “otherwise significantly related to the company’s business,” the staff will consider the proposal in light of the “total mix” of information about the issuer.
In addition, the Division’s analysis of whether a proposal is “otherwise significantly related” under Rule 14a-8(i)(5) has at times been informed by its analysis under the “ordinary business” exception, Rule 14a-8(i)(7). As a result, the availability or unavailability of Rule 14a-8(i)(7) has at times been largely determinative of the availability or unavailability of Rule 14a-8(i)(5). For clarity, the Division will not look to its analysis under Rule 14a-8(i)(7) when evaluating arguments under Rule 14a-8(i)(5). In our view, applying separate analytical frameworks will ensure that each basis for exclusion serves its intended purpose.
On the “ordinary business” exclusion, SLB 14M calls out that this exclusion rests on the central considerations of the proposal’s subject matter and the degree to which the proposal “micromanages” the company. On the first prong, the Bulletin says (in part):
[T]he staff will take a company-specific approach in evaluating significance, rather than focusing solely on whether a proposal raises a policy issue with broad societal impact or whether particular issues or categories of issues are universally “significant.” Accordingly, a policy issue that is significant to one company may not be significant to another. The Division’s analysis will focus on whether the proposal deals with a matter relating to an individual company’s ordinary business operations or raises a policy issue that transcends the individual company’s ordinary business operations.
On micromanagement, Corp Fin has reinstated Sections C.2 and C.3 of SLB 14J and Section B.4 of SLB 14K – these subsections are reprinted at the bottom of SLB 14M for convenience. However, SLB 14M does not reinstate the expectation for a no-action request to include a board analysis of the policy issue raised by the proposal. Hallelujah! You can still submit one voluntarily if you’d like to do that.
But wait, there’s more good news! FAQs included at the end of the Bulletin say that the Staff will consider the guidance in place at the time it issues a response to a no-action request. The burden remains on the company to demonstrate that it’s entitled to an exclusion, but if you think this SLB will help your cause, you also can raise new legal arguments as supplemental correspondence via the online portal. You should do that in as timely a manner as possible – and don’t forget to forward copies to the proponent. Keep in mind that the Staff’s response time will be affected if they receive a huge influx of supplemental letters.
Here are a few thoughts from Matthew Sekol about what this could mean for ESG – and anti-ESG – proposals. We’ll be posting memos in our “Shareholder Proposals” Practice Area.
– Liz Dunshee
In addition to rescinding Staff Legal Bulletin 14L, SLB 14M addresses various other aspects of Rule 14a-8. SLB 14L had addressed several of these items as well – the new Bulletin is carrying some things forward and also refining & clarifying the guidance. Here are key takeaways:
1. 2022 Proposal: Confirms the 2022 proposal to amend Rule 14a-8 has not been adopted and is not operative
2. Graphics: States that proponents can use graphics in their proposals, but noting that exclusion may be appropriate under 14a-8(i)(3) where they make the proposal materially false or misleading, render the proposal inherently vague, etc. Also, words in the graphics count towards the proposal’s 500-word limit.
3. Proof of Ownership: Discourages an overly technical reading of proof of ownership letters as a means to exclude a proposal. Also, stating that brokers and banks can continue to provide confirmation of how many shares the proponent held continuously and need not separately calculate the share valuation, and stating that the Staff does not view Rule 14a-8 as requiring a company to send a second deficiency notice to a proponent if the company previously sent an adequate deficiency notice prior to receiving the proponent’s proof of ownership and the company believes that the proponent’s proof of ownership letter contains a defect.
4. Email Communications: To prove delivery of email under Rule 14a-8, the Staff suggests that senders should seek a reply email from the recipient in which the recipient acknowledges receipt and encourages both companies and proponents to do acknowledge receipt when requested. The staff doesn’t consider screenshots of emails on the sender’s device to be proof of delivery. The Staff shares views on submission of proposals, delivery of notices of defects, and responses to notices of defects.
– Liz Dunshee
