Lynn blogged last week that the SEC’s amendments to modernize Items 101, 103 and 105 of Regulation S-K have now been published in the Federal Register. The effective date of the rules is Monday, November 9th – and in practice, that probably means that you need to comply for any filings made after 5:30 pm ET on Friday, November 6th, since those filings will have a Monday filing date. If you haven’t done so already, take a look at last year’s filing dates for your clients/your company to get a handle on exactly when you’ll need to incorporate these new requirements.
There’s been more back & forth in our Q&A Forum about the new rules (see Topic #10,435) – thanks to Bass Berry’s Jay Knight and Goodwin’s John Newell for keeping the conversation going. Jay noted that the Staff has informally said that early compliance with the modernization rules is not permitted, and shared that for Form 10-Ks filed after the effective date that contain more than 15 pages of risk factors, it may be acceptable to have the “forward-looking statement” section also serve as a risk factor summary, if it otherwise satisfies the requirements of Item 105. Many companies will try to keep their risk factors below 15 pages, in order to avoid that requirement altogether. Remember that our Q&A Forum is a good place to exchange ideas and ask questions about topics like this.
The SEC’s amendments to the definitions of “accredited investor” and “QIB” were also published in the Federal Register last week – those rules will go effective on December 8th.
Insider Trading: Pre-Clearance Duration
We recently received the following question from a member on our Q&A Forum (Topic #10,422):
How long does your pre-clearance last for execs?
A couple of members responded:
– At our company, it’s 2-3 days usually, they can request longer and we’ll revisit and extend after the first one expires.
– Our company is pretty conservative on compliance issues like this – but our pre-clearance just lasts for 24 hours.
I noted that our model insider trading policy – which is included in our “Insider Trading Policies” Handbook – suggests 5 business days as the amount of time that pre-clearance lasts, but it varies based on the company’s compliance culture and how common it is for there to be material non-public information that would affect the company’s stock. Periods of 24 hours or 2-3 days are both reasonable as well.
Last week, the Business Roundtable released these “Principles & Policies Addressing Climate Change” – a 16-page statement that declares the US should adopt a “market-based approach” to reduce emissions in line with the Paris Agreement. The BRT is careful to note that carbon should be priced only where it is environmentally and economically effective and administratively feasible, and in a way that continues to foster innovation & competitiveness. This Politico article summarizes the BRT’s positions. Here’s an excerpt:
A “market-based mechanism” is a broad term, and the Business Roundtable did not recommend any one particular design. It called for putting a price on carbon as a means to reduce emissions since “a clear price signal is the most important consideration for encouraging innovation, driving efficiency, and ensuring sustained environmental and economic effectiveness.”
Examples include direct taxation of carbon dioxide emissions as well as cap-and-trade schemes, such as legislation that passed the House in 2009 but fizzled in the Senate.
Any revenues that come from any market-based system should be used to support economic growth, reduce societal impact, and aid people and companies that are the most negatively affected, the goups said. And it should be linked with “at least a doubling of federal funding for research, development and demonstration of (greenhouse gas) reduction technologies.”
As this WaPo article notes, it’s looking like corporate interests may be more likely to claim a seat at the table the next time climate change legislation is considered, versus trying to kill those efforts outright, and that might help us all. However, the BRT’s principles envision reducing emissions by at least 80% from 2005 levels by 2050 and come at a time when the BRT is still drawing scrutiny of last year’s “stakeholder capitalism” pledge – the latest shot being this letter last week from Senator Elizabeth Warran (D-Mass.).
I suspect that a 30-year goal for reducing emissions is not what investors have in mind when they refer to “long-termism” – so if companies are hanging their hats on the BRT timeline, they probably also need to have some convincing talking points for engagements. As illustrated by this “open letter” issued last week by PRI, investors also continue to want companies to reflect climate-related risks in financial reporting.
Director Information Rights: The Latest “WeWork” Gift
We don’t get to blog much about The We Company since its IPO imploded, but their ongoing litigation recently brought us a nugget of corporate governance case law out of the Delaware Court of Chancery. In this opinion, Chancellor Bouchard decided as a matter of first impression that management cannot unilaterally preclude a director from obtaining the company’s privileged information.
The directors who were being kept in the dark here were members of a special committee formed last fall who were opposing the company’s motion to dismiss a complaint that the company filed in April against SoftBank, and they wanted privileged info that had been shared among company management, in-house counsel and outside counsel. The motion to dismiss was brought by a new committee consisting of two temporary directors, which was formed in May.
The info at issue isn’t the info that was shared between the new committee and its counsel, but between the company and its counsel – info about how the new committee was established, etc. Here’s the holding:
This decision holds, under basic principles of Delaware law, that directors of a Delaware corporation are presumptively entitled to obtain the corporation’s privileged information as a joint client of the corporation and any curtailment of that right cannot be imposed unilaterally by corporate management untethered from the oversight and ultimate authority of the corporation’s board of directors. Accordingly,the Special Committee is entitled to receive the privileged information of the Company it is has requested, which, to repeat, does not concern privileged communications between the New Committee and its own counsel.
This opinion is of interest because isolating director factions or underperforming directors through the use of special committees is one avenue that companies use to minimize those directors’ activities when they can’t otherwise be removed and won’t resign – but as this case emphasizes, director information rights must be honored. This blog from Frank Reynolds explains that there is a situation in which a board or committee can withhold privileged information – which exists when there’s sufficient adversity that the director could no longer have an expectation that they were a client of the board’s counsel. Here, the court found that management acted unilaterally – so the exception didn’t apply.
Venture Capital: New NVCA Forms Include Market Term Analysis
The National Venture Capital Association (NVCA) published on July 28, 2020 an updated suite of model venture capital financing documents that reflect the current events shaping the investment climate, and for the first time, embedded analysis of market terms directly in the NVCA’s model term sheet. Venture capital funds, professional investors, emerging companies and their respective advisors will benefit from the summary analysis contained in this article which highlights the most significant changes to the primary model financing documents.
The NVCA’s updates are timely because venture capital investing remains strong despite the challenges of 2020. Pitchbook reports 2,893 U.S. venture capital deals with an aggregate of $45.20B of capital raised as of the second quarter of 2020, representing approximately a 17% reduction in deal count and a 2% increase in aggregate dollars raised over the same period in 2019. Economic uncertainty looms in the market, as does the specter of increased governmental interest in foreign investments in certain emerging businesses.
As we covered in real-time yesterday at our “Executive Compensation Conference,” (archives will be available soon – and you can still register for on-demand viewing of those), after a high-drama “pause” last week, the Rule 14a-8 amendments are finally here. The Commissioners voted 3-2 to adopt the amendments – which include the first revisions to the submission threshold in over 20 years, and the first revisions to the resubmission threshold since 1954. For companies that focus on keeping proposals out of the proxy statement (not all companies, but many!), this is a big deal. Here are the highlights from the SEC’s Fact Sheet:
Submission Thresholds – amend Rule 14a-8(b) by:
– Replacing the current ownership threshold, which requires holding at least $2,000 or 1% of a company’s securities for at least one year, with three alternative thresholds that will require a shareholder to demonstrate continuous ownership of at least:
– $2,000 of the company’s securities for at least three years;
– $15,000 of the company’s securities for at least two years; or
– $25,000 of the company’s securities for at least one year.
– Prohibiting the aggregation of holdings for purposes of satisfying the amended ownership thresholds;
– Requiring that a shareholder who elects to use a representative for the purpose of submitting a shareholder proposal provide documentation to make clear that the representative is authorized to act on the shareholder’s behalf and to provide a meaningful degree of assurance as to the shareholder’s identity, role and interest in a proposal that is submitted for inclusion in a company’s proxy statement; and
– Requiring that each shareholder state that he or she is able to meet with the company, either in person or via teleconference, no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal, and provide contact information as well as specific business days and times that the shareholder is available to discuss the proposal with the company.
– Applying the one-proposal rule to “each person” rather than “each shareholder” who submits a proposal, such that a shareholder-proponent will not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting. Likewise, a representative will not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative were to submit each proposal on behalf of different shareholders.
– Revising the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings from 3%, 6% and 10% for matters previously voted on once, twice or three or more times in the last five years, respectively, with thresholds of 5%, 15% and 25%, respectively. For example, a proposal would need to achieve support by at least 5% of the voting shareholders in its first submission in order to be eligible for resubmission in the following three years. Proposals submitted two and three times in the prior five years would need to achieve 15% and 25% support, respectively, in order to be eligible for resubmission in the following three years.
The amendments will be effective 60 days after publication in the Federal Register – but there’s an important transition period in that the final amendments will first apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022. The final rules also provide for a transition period with respect to the ownership thresholds that will allow shareholders meeting specified conditions to rely on the $2,000/one-year ownership threshold for proposals submitted for an annual or special meeting to be held prior to January 1, 2023.
We’ll be posting the inevitable flood of memos in our “Shareholder Proposals” Practice Area, and will continue to provide guidance on how practice evolves. One thing is already clear – investor groups aren’t happy. CII’s press release says that the amendments will “muzzle the voice of small investors” and lists several benefits of the current proposal process – asserting that it is a cost-effective way for shareholders to communicate with companies. ICCR’s press release takes it a step further, with this quote from Andy Behar of As You Sow:
“The SEC has intervened to disrupt a system that has worked with fairness and integrity for over 50 years,” said Andy Behar, CEO of As You Sow. “Companies have gained deep insight into potential material risks to their businesses, courtesy of their shareholder engagements. Investors have had a forum to raise their concerns, assisting companies to outperform. This is an ecosystem based on mutual respect and a common goal; helping companies be as good as they can be. The new SEC rules will not stop this relationship, they will simply force shareholders to escalate to litigation and other means. This will ultimately cost companies valuable time and resources.”
But Wait, There’s More! SEC Updates Whistleblower Awards Program
Yesterday, the SEC also tackled amendments to the rules governing its whistleblower program – another controversial proposal that was initially scheduled for a few weeks ago but postponed. The final amendments were adopted 3-2 and were accompanied by guidance from the SEC’s Office of the Whistleblower about the process for determining award amounts for eligible whistleblowers. This blog from Matt Kelly of Radical Compliance gives a good overview. Here’s an excerpt:
Among the changes: a presumption toward more generous awards at the lower end of the pay scale, restrictions on people who abuse the tipster process too often, and faster disposal of would-be tips that don’t meet the awards program criteria.
And the controversial idea to cap large awards at $30 million — technically killed, although the SEC’s two Democratic commissioners still objected that the agency could use other measures to achieve that same end of whittling down large awards.
A few years ago, Broc blogged about a “request for comment” on Guide 3 – the industry guide for banks and bank holding companies. That effort has now come to fruition as the SEC (unanimously!) adopted amendments on September 11th, which update & expand statistical disclosure requirements and move “Guide 3” requirements into Reg S-K. We’re posting memos in our “Financial Institutions” Practice Area.
Today is our “17th Annual Executive Compensation Conference” – Monday & Tuesday were our “Proxy Disclosure Conference.” For those who haven’t been attending the conferences – or for those who have and want to watch again – we ran a special tribute video yesterday to honor Marty Dunn. Marty was a legend in our community and is deeply missed.
You can still register online to get immediate access to these virtual events. Both conferences are paired together and they’ll also be archived for attendees until next August. That’s a huge value. Here’s more info:
– How to Attend: Once you register, you’ll receive a Registration Confirmation email from mvp@markeys.com. Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.
– How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on TheCorporateCounsel.net or CompensationStandards.com.
– How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
OTC: SEC Amends Information Requirements
Last week, the SEC closed the loop on a proposal from last year and adopted amendments to Rule 15c2-11 to modernize the type of information that needs to be available for broker-dealers to quote securities on the OTC markets. In keeping with the SEC’s current focus on outdated rules, this one was last amended about thirty years ago. Here’s an excerpt from the SEC’s fact sheet about the amendments (and here are statements from SEC Chair Jay Clayton & Commissioner Hester Peirce):
The amendments facilitate transparency of OTC issuer information by:
– Requiring to be current and publicly available certain specified documents and information regarding OTC issuers that a broker-dealer or qualified IDQS must obtain and review for the broker-dealer to commence a quoted market in an OTC issuer’s security (“information review requirement”);
The amendments provide greater investor protections when broker-dealers rely on the piggyback exception by:
– Providing a time-limited window of 18 months during which broker-dealers may quote the securities of “shell companies.”
The amendments reduce unnecessary burdens on broker-dealers by:
– Allowing broker-dealers to initiate a quoted market for a security if a qualified IDQS complies with the information review requirement and makes a publicly available determination of such compliance; and
– Providing new exceptions, without undermining the Rule’s important investor protections, for broker-dealers to:
– Quote actively traded securities of well-capitalized issuers;
– Quote securities issued in an underwritten offering if the broker-dealer is named as an underwriter in the registration statement or offering statement for the underwritten offering, and the broker-dealer that is the named underwriter quotes the security; and
– Rely on certain third-party publicly available determinations that the requirements of certain exceptions are met.
The rule will have a general compliance date that is 9 months after the effective date – and a compliance date that is 2 years after the effective date for the provisions that require a company’s financial info for the last 2 fiscal years to be current and publicly available.
How to Successfully Uplist
This blog from the Small Cap Institute points out that uplisting is a transformative event that is more than just a single transaction – it requires months of planning, and nearly perfect post-closing execution to assure investors that the company will be profitable investment. Here’s one tip for success:
Sell Stock to the Right Audience: Most companies that uplist have predominantly retail shareholder bases (i.e., their investors are mostly nonprofessional investors). Most companies that uplist also have stocks that trade less than $250,000 of stock per day. For reasons we cover in this piece about trading volume, most institutional investors are mathematically foreclosed from buying stocks that trade less than $250,000 per day, whether they like your company or not.
Unfortunately, due to either ignorance or disingenuous advice, myriad uplisted companies with daily trading volume less than $250,000 waste enormous amounts of time and money endlessly meeting around the country with institutional investors, who simply can’t buy their stock – and won’t.
As John blogged last week on DealLawyers, SPACs have been having a “moment” due to this year’s market volatility. Yesterday afternoon, Corp Fin issued a new “Securities Act Forms” CDI #115.18 to address the Form S-3 eligibility of companies that go public via merger into a SPAC.
Question 115.18
Question: Following the merger of a private operating company or companies with or into a reporting shell company (for example, a special purpose acquisition company), may the resulting combined entity rely on the reporting shell company’s pre-combination reporting history to satisfy the eligibility requirements of Form S-3 during the 12 calendar months following the business combination?
Answer: If the registrant is a new entity following the business combination transaction with a shell company, the registrant would need 12 calendar months of Exchange Act reporting history following the business combination transaction in order to satisfy General Instruction I.A.3 before Form S-3 would become available. If the registrant is a “successor registrant,” General Instruction I.A.6(a) would not be available because the succession was not primarily for the purpose of changing the state of incorporation of the predecessor or forming a holding company. General Instruction I.A.6(b) also would not be available because the private operating company or companies would not have met the registrant requirements to use Form S-3 prior to the succession.
Where the registrant is not a new entity or a “successor registrant,” the combined entity would have less than 12 calendar months of post-combination Exchange Act reporting history. Form S-3 is premised on the widespread dissemination to the marketplace of an issuer’s Exchange Act reports over at least a 12-month period. Accordingly, in situations where the combined entity lacks a 12-month history of Exchange Act reporting, the staff is unlikely to be able to accelerate effectiveness under Section 8(a) of the Securities Act, which requires the staff, among other things, to give “due regard to the adequacy of the information respecting the issuer theretofore available to the public,…and to the public interest and the protection of investors.” [September 21, 2020]
219.05 In reporting compensation for periods affected by COVID-19, questions may arise whether benefits provided to executive officers because of the COVID-19 pandemic constitute perquisites or personal benefits for purposes of the disclosure required by Item 402(c)(2)(ix)(A) and determining which executive officers are “named executive officers” under Item 402(a)(3)(iii) and (iv). The two-step analysis articulated by the Commission in Release 33-8732A continues to apply when determining whether an item provided because of the COVID-19 pandemic constitutes a perquisite or personal benefit.
– An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties.
– Otherwise, an item that confers a direct or indirect benefit and that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, is a perquisite or personal benefit unless it is generally available on a non-discriminatory basis to all employees.
Whether an item is “integrally and directly related to the performance of the executive’s duties” depends on the particular facts. In some cases, an item considered a perquisite or personal benefit when provided in the past may not be considered as such when provided as a result of COVID-19. For example, enhanced technology needed to make the NEO’s home his or her primary workplace upon imposition of local stay-at-home orders would generally not be a perquisite or personal benefit because of the integral and direct relationship to the performance of the executive’s duties. On the other hand, items such as new health-related or personal transportation benefits provided to address new risks arising because of COVID-19, if they are not integrally and directly related to the performance of the executive’s duties, may be perquisites or personal benefits even if the company would not have provided the benefit but for the COVID-19 pandemic, unless they are generally available to all employees.
Today: “Proxy Disclosure Conference – Part 2”
Today is the second day of our “Proxy Disclosure Conference” – tomorrow is our “17th Annual Executive Compensation Conference.” You can still register online to get immediate access to these virtual events! Both conferences are paired together and they’ll also be archived for attendees until next August. That’s a huge value.
– How to Attend: Once you register, you’ll receive a Registration Confirmation email from mvp@markeys.com. Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.
– How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on TheCorporateCounsel.net or CompensationStandards.com.
– How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
Today and tomorrow is our “Proxy Disclosure Conference” – Wednesday is our “17th Annual Executive Compensation Conference.” Here are the agendas: 15 substantive panels over 3 days – plus 6 breakout roundtables today that you can choose from. Check out my promo video to see what’s in store! You can still register online to get immediate access to these virtual events! Both conferences are paired together and they’ll also be archived for attendees until next August. That’s a huge value.
– How to Attend: Once you register, you’ll receive a Registration Confirmation email from mvp@markeys.com. Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.
– How to Participate in a Roundtable: New this year, we have added interactive roundtables to discuss pressing topics! We hope you’ll join us for one of these half-hour breakout sessions. Space is limited for those, but you can save yourself a seat ahead of time by navigating to the agenda tab in the mvp platform and clicking on the seat icon next to the roundtable you want to attend.
– How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on TheCorporateCounsel.net or CompensationStandards.com.
– How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
EU Considering Options for “Sustainable Corporate Governance”
The European Commission is studying the root causes of “short-termism” and wants to enact an EU-level solution that would make directors more accountable for companies meeting the UN Sustainable Development Goals and the goals of the Paris Agreement on climate change. The findings are summarized in this 185-page report – and it looks like one option that’s on the table is changing the formulation of director duties in EU nations. It characterizes these 7 areas as “key problem drivers” (also see this Wachtell memo):
1.Directors’ duties and company’s interest are interpreted narrowly and tend to favour the short-term maximisation of shareholder value
2.Growing pressures from investors with a short-term horizon contribute to increasing the boards’ focus on short-term financial returns to shareholders at the expense of long-term value creation
3.Companieslack a strategic perspective over sustainability and current practices fail to effectively identify and manage relevant sustainability risks and impacts
4.Board remuneration structures incentivize the focus on short-term shareholder value rather than long-term value creation for the company
5.The current board composition does not fully support a shift towards sustainability
6.Current corporate governance frameworks and practices do not sufficiently voice the long-term interests of stakeholders
7.Enforcement of the directors’ duty to act in the long-term interest of company is limited
B-Corps: Getting More Useful?
Last week, Veeva Systems – an NYSE-traded company with a $40B market cap – announced that it had formed a board committee to explore becoming a public benefit corporation – along with shedding its main anti-takeover provisions. That’s a pretty unique move for a company that’s not even consumer-facing, and if Veeva proceeds, they would join only three publicly traded companies incorporated under Delaware’s “public benefit corporation” statute – Laureate Education, Lemonade and Vital Farms.
Some are predicting that more might convert – or that we will see more public company subs going that route, as Danone North America and Proctor & Gamble’s “New Chapter” have done. This MoFo memo analyzes the three current public company PBCs, extracts some lessons, and explains the possible benefit:
An obligation to report on ESG considerations and risks is not the same as an obligation to pursue a public benefit potentially to the detriment of short-term stockholder value. Adopting a PBC form allows boards of directors and management to balance these considerations and make the choices they think are right, while having a defense from activist stockholders that may be off-put by a quarter or year of lower-than-hoped results. Because of this, PBCs have been touted as a potential solution both to the problem of short-termism in issuer and investor behaviors and to companies seeking to maximize profits for stockholders and passing associated negative externalities to the public at large.
Meanwhile, this Seyfarth memo notes some of the hurdles for public company PBCs – compared to the over 3,000 privately held companies have now gone through the B-Lab process to become Certified B-Corps. Here’s an excerpt:
Because of the need for, and cost associated with, a shareholder vote to reincorporate an entity, among other reasons, this can be a practical barrier to B Corp certification for public companies. Notwithstanding, B Corps are slowly making their way into the public company space – with Danone North America leading as the world’s largest B Corp. At this juncture, the few other public B Corps were certified before becoming public.
Demand for B-corps – although limited – may be helped along by Delaware’s recent amendments to its “public benefit corporation” statute – which make it easier to convert to that structure and afford more protections to PBC directors. As John recently blogged on The Mentor Blog, this Ropes & Gray memo takes a deep dive into the amendments. Here’s a summary:
– Voting Thresholds for Opting In and Opting Out Lowered. The 2020 PBC amendments eliminated Section 363(a) and (c) – which had originally required 90% approval to convert in or out of PBC status. The result is that the voting thresholds for conversions, mergers and consolidations involving PBCs are now governed by Sections 242(b) and 251 of the DGCL, which provide for majority voting unless the certificate of incorporation provides otherwise.
– Elimination of Statutory Appraisal Rights in Connection with PBC Conversions. The 2020 PBC amendments eliminated Section 363(b) – which had provided appraisal rights to stockholders who didn’t approve of a conversion to the PBC entity form. As a result, there no longer is a specific statutory appraisal right if a conventional corporation converts to a PBC. Appraisal rights in connection with PBC mergers and consolidations are now governed by Section 262 of the DGCL, which addresses appraisal rights in connection with mergers and consolidations more generally.
– Director Protections Strengthened. As discussed above, under Section 365(a) of the DGCL, directors of a PBC must balance the pecuniary interest of stockholders, the interests of other stakeholders and the specific public benefit identified in the certificate of incorporation. Section 365(c) has been amended to clarify that a director’s ownership of stock or other interests in the PBC does not inherently create a conflict of interest, unless the ownership of the interests would create a conflict of interest in a conventional corporation.
In addition, the 2020 PBC amendments revised Section 365(c) to provide that any failure on a director’s part to satisfy Section 365(a)’s balancing requirement does not constitute an act or omission not in good faith or a breach of the duty of loyalty for purposes of Section 102(b)(7) (exculpation of directors) or Section 145 (indemnification) of the DGCL, unless the certificate of incorporation provides otherwise. Previously, this was framed as an opt-in in Section 365(c), rather than as an opt-out.
– Ability to Bring Derivative Suit Brought into Alignment with Conventional Corporations. Amendments to Section 367 align the thresholds for PBC derivative actions with those applicable to conventional corporations.
Farewell to Justice Ruth Bader Ginsburg
Late Friday, the SEC Commissioners issued a joint statement on the passing of Justice Ruth Bader Ginsburg (here is her NYT obituary):
We join the nation in mourning the passing of Justice Ruth Bader Ginsburg. Justice Ginsburg’s powerful intellect and determination shaped decisions that had meaningful impacts for all Americans, including our nation’s investors. She inspired many, and her trailblazing career will serve as a model of public service and dedication to our country for generations to come.
Lynn blogged last week about the SEC’s amended “accredited investor” definition. We’re posting the avalanche of memos in our “Private Placements” Practice Area. Courtesy of the Stinson firm, we’ve also now posted a sample subscription agreement – in Word format and in a redlined PDF that shows updates for the new definition.
Eight Steps to Better Board Succession
This Heidrick & Struggles memo describes the increasingly complicated and important issue of board composition – and notes that too few boards rigorously evaluate their composition to ensure they’re meeting demands for digital & sustainability expertise and diverse experiences. If director recruitment is an ongoing process, boards are better able to plan ahead and “future-proof” the organization. They recommend these eight steps to better board succession:
1. At least annually, evaluate board composition, individual director performance, and full board effectiveness in the context of the organization’s strategic objectives and purpose.
2. Make sure a single person is accountable for that process (likely the chair of the nominating and governance committee) but that it is broadly embraced by the full board.
3. Establish benchmarks for key areas of board composition, considering peer boards or other high-performing organizations.
4. Map out the skills and experiences the board will need to meet its objectives for the next 5 to 10 years holistically, taking into consideration multiple directors moving on and off the board. Refresh and discuss these needs annually.
5. As the company’s needs change, so should the board. Board refreshment through term limits, age limits, and regular evaluations against the strategic skills matrix is key.
6. Develop new recruitment strategies that challenge long-held norms about the most useful networks for recruiting and the most important types of career experience. Search broadly. Be open minded. (Note – this is especially important given investors’ focus on diversity)
7. Build relationships now with potential future directors. Get to know them today for tomorrow’s needs.
8. Ensure the board is both inclusive and attractive to potential directors. Test your assumptions about what inclusivity means for your board.
Transcript: “CEO Succession Planning in the Crisis Era”
We’ve posted the transcript for our recent webcast: “CEO Succession Planning in the Crisis Era,” which covered these topics:
– Why succession planning should be high priority
– How to maintain a dynamic & adaptable succession plan
– Keeping track of contract & procedural requirements
– Disclosure implications
– Transition mechanics
– Steps for boards & advisors to take right now
Earlier this week, the SEC announced two pretty substantial whistleblower awards – a joint $2.5 million award and a $1.25 million award – which looked like a lead-up to yesterday’s highly anticipated open meeting, at which the Commission would consider adopting amendments to its whistleblower program. Late Tuesday, however, the SEC posted a cancellation notice for the open meeting, and while sometimes the Commission still moves forward with rule adoption in that scenario, it’s not the case this time around (at least so far).
While the rulemaking delay might be a function of holiday schedules, given the controversial nature of the proposed amendments, this WSJ article notes that it’s the second time rulemaking has been called off and speculates that the Commissioners may not have reached consensus quite yet. The article summarizes the history behind the proposed changes – here’s an excerpt:
The regulator unveiled the proposed changes in 2018. Under the whistleblower program, tipsters who provide information that leads to a successful enforcement action against a company can be eligible for an award of between 10% and 30% of the overall monetary sanction.
Whistleblower advocates have supported changes that the SEC says would make it more efficient in processing claims, including one that would allow it to ban tipsters who provide false information or make repeated, frivolous claims.
But they have mounted a vocal opposition to several other amendments, including one that would allow the SEC to downsize awards for information that leads to fines of $100 million or more, simply because of their size. The amendment would disincentivize the highest-paid Wall Street insiders from providing information, whistleblower lawyers have said.
Whistleblower advocates have also criticized new guidance that could restrict the type of information whistleblowers can be rewarded for providing, and a new rule that disqualifies tipsters who don’t submit a special form before contacting the SEC.
DOL Takes Another Crack at ESG
Earlier this week, the US Department of Labor issued this proposal – to clarify how ERISA fiduciaries should exercise their proxy voting and other shareholder rights under the statute’s “investment duties” section. In a defensive move against “ESG” voting, the proposal says that fiduciaries can’t vote any proxy unless they determine that the matter has an economic impact on the plan. And as a follow-up to the SEC’s proxy advisor rules, the proposal also outlines “permitted practices” that fiduciaries are able to follow when voting, such as applying proxy voting policies. This Stinson blog gives more background – here’s an excerpt:
The DOL is concerned that some fiduciaries and proxy advisory firms may be acting in ways that unwittingly allow plan assets to be used to support or pursue proxy proposals for environmental, social, or public policy agendas that have no connection to increasing the value of investments used for the payment of benefits or plan administrative expenses, and in fact may have unnecessarily increased plan expenses
The Department has issued sub-regulatory guidance and individual letters over the years affirming that, in voting proxies and in exercising other shareholder rights, plan fiduciaries must consider factors that may affect the value of the plan’s investment and not subordinate the interest of participants and beneficiaries in their retirement income to unrelated objectives. The Department believes, however, that aspects of the guidance and letters may have led to some confusion or misunderstandings. The proposal is designed to address those issues through a notice and comment rulemaking process that will build a public record to help the Department develop an improved investment duties regulation with the goal of ensuring plan fiduciaries execute their ERISA duties in an appropriate and cost-efficient manner when exercising shareholder rights.
According to a DOL official, the proposal would clarify Employee Retirement Income Security Act fiduciary duties for proxy voting and monitoring proxy advisory firms. In addition, the proposed rule would reduce plan expenses by giving fiduciaries clear directions to refrain from spending workers’ retirement savings to research and vote on matters that are not expected to have an economic impact on the plan.
This proposal is different than the proposed rule on “Financial Factors in Selecting Plan Investments” that the DOL issued in late June and has drawn over 1,000 comment letters – many in opposition. Both this proposal and the one from June are proposed amendments to 29 CFR 2550.404a-1. This week’s proposal states:
Both proposals include a proposed paragraph (g), but the Financial Factors in Selecting Plan Investments proposal proposes an effective date of 60 days after publication of a final rule. Depending on the publication date of the respective final rules, the Department may need to revise paragraph (g) to separately effectuate the final rules.
Reg S-K Modernization: Interplay with Form 10-K “Description of Business”
We’ve been posting a ton of memos about last week’s Reg S-K amendments – including this one from Gibson Dunn that includes perspectives on what the changes mean from a practical perspective and potential problems (as well as a summary table and blackline of the Reg S-K items). In addition, we’ve been fielding quite a few questions about the mechanics of last week’s Reg S-K amendments in our Q&A Forum – like this question about the interplay between the new rules and Item 1 of Form 10-K (#10,433):
The new rule amendments adopted by the SEC last week require disclosure of information material to an understanding of the general development of a company’s business and replace the 5-year (or 3-year for SRCs) time period specified in S-K 101(a) with a materiality standard. How is this rule change intended to apply to Form 10-Ks? There is no discussion in the proposing or the adopting release, but Form 10-K, Item 1. Business is very clear that “the discussion of the development of the registrant’s business need only include developments since the beginning of the fiscal year for which this report is filed.”
Does anyone have views on whether this was an oversight in the new rulemaking? The discussion in both the proposing and adopting releases appears to suggest that the new Item 101(a) amendments apply to all reports/registration statements subject to Item 101(a). But, there was no attempt in the rulemaking to amend the Form 10-K instruction quoted above. Therefore, based on a very plain and clear reading, the Form 10-K discussion is only required to include a discussion of the general development of the business since the beginning of the last fiscal year.
Do others agree / have other thoughts?
John responded:
That’s an interesting observation. I agree that there appears to be a disconnect between the new language of Item 101(a) and the current requirements of Item 1 of Form 10-K. In reading the adopting release, the intent of revised Item 101(a) appears to be that companies must either provide a full blown, principles based description of the development of the business that addresses the matters identified in Item 101(a)(1), to the extent material, or simply provide an update & incorporate the more complete disclosure by reference along with the link required by Item 101(a)(2). But the Form 10-K line item continues to require updating disclosure addressing only the fiscal year covered by the report, so some sort of clarification (or a revision to the 10-K line item) would be helpful.
For a fair number of companies, this issue probably isn’t going to matter very much. That’s because many companies have a practice of continuing to provide a discussion of the general development of their business over the previously required five year period in their 10-K filings, rather than just providing updating disclosure covering the most recent fiscal year. For example, check out GM’s comment letter on the rule proposal in which it objected to the proposal to permit only updating disclosure. GM’s letter noted that “this rule change would have a minimal impact on GM’s current disclosure,” and stated the company’s belief that “the entirety of this disclosure should be included in each filing.”
Last week, the Delaware Court of Chancery rejected a motion to dismiss in Teamsters Local 443 Health Services & Insurance Plan v. Chou – making it the latest in a string of Caremark claims that have made it past the pleadings stage. This blog from Ann Lipton explains the case – and notes that unlike other recent Caremark claims, VC Glasscock appeared to be much more cautious in finding a “failure to monitor.”
What tripped up the defendants in this case was the finding that the board had ignored red flags of illegal activity. The illegal activity involved a subsidiary that was pooling excess “overfill” medication from cancer vials into additional syringes, which led to contamination. This Troutman Pepper memo summarizes the three red flags that the plaintiffs adequately pled the board had ignored:
1. An outside law firm report had previously identified that Specialty, and by extension, Pharmacy, was not integrated into ABC’s compliance and reporting function, which according to the court, constituted a red flag that Specialty’s compliance mechanisms had substantial gaps that the audit committee had failed to follow-up on and rectify.
2. A former executive of Specialty had filed a complaint under seal in federal district court,alleging that Pharmacy’s business was essentially an illegal operation and, although ABC’s 2010 and 2011 Form 10-K disclosed the suit and was signed by ABC’s board of directors, the ABC board failed to take any remedial steps.
3. Specialty had received a subpoena from federal prosecutors which ABC believed, according to plaintiffs, related to the former Specialty executive’s action, which was subsequently disclosed in ABC’s 2012 Form 10-K, which was also signed by the ABC directors, and which was not referenced in the minutes of board or committee meetings.
The court found that it was conceivable that the board didn’t take any action to respond to the compliance report or either of the Form 10-K disclosures – therefore, the litigation is moving forward. This case highlights that directors who sign securities filings not only need to ensure that disclosure of legal proceedings & contingencies is accurate, they need to actually follow up on any concerning substance. As Troutman Pepper’s memo explains, those discussions should also be referenced in minutes:
Corporate fiduciaries and practitioners alike should be aware that corporate fiduciaries will be deemed to have knowledge of disclosures contained in filings and documents that they have executed (such as a Form 10-K). In this regard, it is especially important that directors are aware of, understand, and ask questions about what they are signing as a matter of compliance with their fiduciary duties.
In addition, Teamsters is evidence that minutes of board of directors and audit committee meetings will be heavily scrutinized in litigation. As applied in Teamsters, the absence of references to a red flag in minutes is equivalent to the board of directors or committee never having discussed the matter. Thus, counsel engaged in the representation of boards of directors and audit committees, as well as corporate officers, should be especially vigilant when drafting minutes in connection with the investigation and resolution of red flags.
Minutes should reflect that the risk or red flag was disclosed to the board or audit committee, that the board or audit committee followed-up on that risk and sought additional information, and ultimately, that the board either took at least some action to rectify that risk or red flag or determined that the risk or red flag was not necessary to further address.
NYSE’s “Direct Listings” Rule: Stayed!
Lynn blogged last week about the SEC order granting approval of the NYSE’s “direct listing” proposal for primary offerings. Yesterday, the SEC posted this letter to John Carey, Senior Director of the NYSE, to say that it had received a notice of intention to petition for review of its action under Rule 430 of the Administrative Procedure Act – which, according to this WSJ article, came from CII. Therefore, the direct listings order is stayed until the Commission orders otherwise.
This is just the latest in the ongoing back & forth on this rule change – last year, the SEC rejected the NYSE’s first attempt at a proposal only one week after it was filed.
Transcript: “Distressed M&A – Dealmaking in the New Normal”
We’ve posted the transcript for our recent DealLawyers.com webcast: “Distressed M&A – Dealmaking in the New Normal.”
Corp Fin has sent comment letters to several well-established companies to request more info on their supply-chain finance arrangements – a practice that this WSJ article says the three biggest ratings firms highlighted as a “sleeping risk” last spring. Here’s an excerpt from the June comment letter to the Coca-Cola Company:
We note from your disclosures that accounts payable increased roughly $1.1 billion in 2019 due to the extension of payment terms with your suppliers. We further note from external sources that it appears you have in place a supply chain finance program. To the extent supply chain finance arrangements are reasonably likely to affect your liquidity in the future, please disclose the following:
• The impact the arrangements have on operating cash flows;
• The material and relevant terms of the arrangements;
• The general risks and benefits of the arrangements;
• Any guarantees provided by subsidiaries and/or the parent;
• Any plans to further extend terms to suppliers;
• Any factors that may limit your ability to continue using similar arrangements to further improve operating cash flows; and
• Trends and uncertainties related to the extension of payment terms under the arrangements.
In addition, please consider disclosing and discussing changes in your accounts payable days outstanding to provide investor’s with a metric of how supply chain finance arrangements impact your working capital.
In this response, the company resolved the comment by providing a draft of its intended future disclosure to describe the supply chain finance program in more detail in its MD&A – as well as its impact on cash flows, and associated risks & benefits.
This WSJ article notes that the SEC has increased scrutiny of supply chain finance arrangements over the last year and a half, and names a few more companies who’ve been on the receiving end of that scrutiny. Corp Fin called out supply chain finance arrangements in its Topic 9A Disclosure Guidance in June – and the practice also got a mention in the SEC’s adopting release for last week’s Reg S-K amendments:
Under the proposed amendments to Item 101(c), the revised rule would not explicitly reference the disclosure requirements under Item 101(c)(1)(vi) regarding disclosure of working capital practices, Item 101(c)(1)(ii) requirement regarding disclosure about new segments, or the Item 101(c)(1)(viii) dollar amount of backlog orders believed to be firm. Nevertheless, under the proposed principles-based approach, registrants would have to provide disclosure about these topics, as well as any other topics regarding their business, if they are material to an understanding of the business and not otherwise disclosed.
For example, if supply chain finance arrangements used by a registrant are a significant part of its working capital practices, they may be material to understanding the nature of its commercial relationships. While MD&A disclosures on the topic are more focused on the potential material impact of such arrangements on the registrant’s periodic cash flows and financial condition, the proposed principles-based approach would call for additional disclosure if material to an understanding of those commercial relationships. We discuss the proposals and our revisions with respect to the final amendments below.
CCPA Regs Now Effective: Update Your Privacy Policies
Final regulations under the California Consumer Privacy Act are now effective. There were a few changes from the previously proposed version, according to this BakerHostetler memo. This Quarles & Brady memo highlights several action items that result from the regulations – including an annual review of your privacy policy. Here’s an excerpt:
Review and update your privacy policy to include the more detailed disclosures required by the Regulations. Don’t forget that reviewing and updating your privacy policy must happen on an annual basis. It is not a one and done exercise.
Our September Eminders is Posted!
We have posted the September issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address!
