This Cooley PubCo blog discusses the latest development in the now five-year-long saga involving the SEC’s proxy advisor rulemaking. In February, Liz shared that a federal district court had ruled in favor of ISS in its lawsuit challenging the SEC’s 2020 rule that would have subjected proxy advisors to enhanced regulations by saying they engage in the “solicitation” of proxies. She noted that the National Association of Manufacturers was considering an appeal.
The Cooley blog says that both NAM and the SEC have now filed notices of appeal. “NAM first on April 16, with the SEC following a week later on April 23. Subsequently, the clerk of the DC Circuit filed an order consolidating the two appeals and setting out a schedule for various submissions by the parties.”
The blog highlights that the SEC and NAM are head-to-head in another lawsuit involving the same rulemaking.
As noted above, in this case brought by ISS, NAM favored the 2020 amendments, which led it to intervene on the side of the SEC (and also to its becoming a defendant). It may be a little head-spinning, but NAM also has a separate case challenging the proxy advisor rules against the SEC before the Fifth Circuit. In July 2022, NAM filed a complaint against the SEC, asking that the 2022 amendments to the proxy advisor rules—which, as noted above, reversed some of the key provisions in the 2020 rules, including the company-favorable condition that would have required company engagement—be set aside under the APA and declared unlawful and void. In September, NAM filed a motion for summary judgment, characterizing the case as “a study in capricious agency action.”
In December 2022, the Federal District Court for the Western District of Texas issued an Order granting summary judgment to the SEC and Gensler and denying summary judgment to NAM in that litigation. (See this PubCo post.) NAM appealed, and in August 2023, a three-judge panel of the Fifth Circuit heard oral argument on NAM’s appeal.
Since that case is ongoing and a decision has yet to be issued, the blog notes that the two opposing parties, SEC and NAM, in a brief moment of concurrence roundtable, jointly advised the Court of their appeals in the ISS litigation.
This time last year, Time Magazine ran the enticing article “The AI Job That Pays Up to $335K—and You Don’t Need a Computer Engineering Background.” The job, of course, was “prompt engineer,” and the article suggested a humanities background might be best for this role. While it was focused on prompt engineering as an AI training tool, prompt engineering is also key to employing generative AI in its various practical applications — since fine-tuning inputs is key to better generative AI outputs.
I must admit that I remain wary of legal applications of generative AI, but this Loeb & Loeb Quick Take on generative AI was a welcome reminder that there’s a fast-moving (now more AI-run) world out there that keeps advancing whether I’m ready or not! And I better get with the times since the post argues that using gen AI tools “is becoming an essential skill” for lawyers to streamline workflows, improve efficiency and “meet the evolving demands of clients.” Enter the need to “become proficient in ‘engineering’ your prompts.”
The post gives six tips to help lawyers improve their “prompt engineering” skills without formal training. Here are a few:
Be Precise: Accuracy and precision are critical when it comes to the law. Avoid ambiguity in your prompts by using clear, concise, and plain language. Aim for a conversational tone, avoid legalese, and explain to the tool the meaning of any acronyms and other abbreviations used in the prompt.
Specify the Why and the What: Clearly state your goal. What information are you seeking? What action do you want the AI tool to take? Once the intent is established, provide specific instructions on the desired output. For example, specify the “voice” you are looking for (e.g., formal, casual, personal, adversarial), and indicate the format you want for the output (e.g., a summary, an analysis, a draft, a bullet-point list, a table, a deck slide, an email correspondence, a blog-post, etc.).
Iterate and Refine: Leverage the chat-based nature of GenAI tools. You can have a back-and-forth conversation with the tool, providing additional context and tweaking prompts on an iterative basis. Try starting with a basic question, then keep refining the prompt (such as by adding more context and specificity, identifying problems with the output from an earlier prompt, and/or changing the tone or terminology) as needed to steer the AI tool towards a more relevant and focused output.
Despite my AI reluctance (is that an official term yet?), I do recognize the value in developing these skills. So I’ve started leveraging ChatGPT for some low-risk personal applications — things like creating vacation itineraries, meal plans & grocery lists — and have found employing these tips to be crucial to getting useful outputs even for these basic, personal tasks. When I went to check out the “family-friendly restaurants” it recommended for one vacation, I discovered a number of them had closed during the pandemic, which also gave me personal experience & understanding of some of the risks of using generative AI and why it’s so important to do your own work.
Ideagen Audit Analytics recently released its annual market share analysis of public company auditors as of early 2024. Here are some takeaways from the summary:
– 239 audit firms conducted audits for 6,607 registrants
– The top ten firms audited 68% of registrants
– Among large accelerated filers, the Big Four audited 90% of registrants
– Audit firm market share was diverse among SRCs, with several firms outside of the Big Four holding a top spot
– The Big Four generally topped the lists and, excluding SPACs, the fourth Big Four player had a 5% market share lead on the audit firm ranked fifth
Yesterday, in McRitchie v. Zuckerberg (Del. Ch.; 4/24), Vice Chancellor Laster confirmed that directors owe “firm-specific fiduciary duties” under Delaware corporate law. The plaintiff in this lawsuit against Meta is the well-known shareholder proposal proponent, shareholder advocate and corporate governance author, James McRitchie, who discussed the lawsuit in a blog post around the time it was filed. The lawsuit was supported by The Shareholder Commons (a non-profit that has been advocating for “beta stewardship” for the past several years) and, as described in this post after a December hearing, is predicated on the view that a “narrow, company-only view of shareholder primacy fails most shareholders, is inconsistent with modern investing practices, and threatens markets’ utility to allocate resources.”
VC Laster explains the arguments as follows:
[U]nder Modern Portfolio Theory, prudent investors diversify. Therefore, says the plaintiff, the law must operate on the assumption that a corporation’s stockholders are diversified. The plaintiff concludes that owing fiduciary duties to the corporation and its stockholders must mean owing duties that run to the corporation and its stockholders as diversified equity investors. Furthermore, according to the plaintiff, because the returns that accrue to diversified equity investors should generally track the economy as a whole, complying with fiduciary duties oriented to diversified equity investors must mean managing the corporation based on what would be best for the economy as a whole.
The complaint contends that Delaware follows this model and, if it doesn’t, the law should change. As to Meta, it argues that Meta is “the poster child for a systemically significant firm” and that the Meta board has managed the company “to generate firm-specific value at the expense of the economy as a whole” at least partially due to the directors’ own wealth being overly invested in Meta shares creating a conflict of interest.
The Meta directors moved to dismiss, conceding that they manage the company under a firm-specific model, but maintaining that Delaware law requires them to do so. VC Laster agreed.
Under the standard Delaware formulation, directors owe fiduciary duties to the corporation and its stockholders. Implicitly, the “stockholders” are the stockholders of the specific corporation that the directors serve, i.e., “its” stockholders. The standard Delaware formulation thus contemplates a single-firm model (or firm-specific model) in which directors of a corporation owe duties to the stockholders as investors in that corporation. That point is so basic that no Delaware decisions have felt the need to say it. Fish don’t talk about water.
He notes that the plaintiff’s principal argument “rests on policy” — that is, corporations would treat externality-creating activities differently under a diversified investor model. While saying “[t]here are reasons to be skeptical” of that argument, he also points out that the DGCL authorizes private ordering and tailored director duties in a company’s certificate of incorporation.
In a footnote, he points to an article from former Chief Justice Leo Strine that supports federally mandating that public companies “become Delaware public benefit corporations under a worker co-determination model.” Despite former Chief Justice Leo Strine expressing solidarity with the movement to address externalities since retiring from the bench, he notes that the authors “did not argue for changing the traditional fiduciary orientation of corporate law.”
Bloomberg recently reported that a third of S&P 500 trades are now executed in the last 10 minutes of the trading day, based on data from BestEx Research. The standard trading day is 390 minutes. The article attributes the concentrated trading to index funds that buy and sell near the closing of trading since “the last prices of the day are used to set the benchmarks they aim to replicate.” The increase is part of the decade-long trend of increasing assets in passive equity funds and active funds following along to take advantage of the liquidity.
The article goes on to describe the mechanism to determine closing prices — the closing auction — which “runs alongside the last minutes of continuous trading” and highlights that “nearly 10% of all US shares were traded in that closing auction last month.” If you haven’t had to deal with a trading halt recently and ever feel like those Market Watch notices the stock exchanges require are just one more thing to do in the throes of releasing material news, understanding this process and the trading volume over a short period may be a good reminder of the purpose behind those notification obligations.
NYSE recently reminded listed companies that, in addition to the 10-minute prior notice for material news announcements, they are also prohibited from publishing material news after the official close until the earlier of 4:05 p.m. ET or the publication of the official closing price for the security. NYSE states that “the requirement is designed to alleviate confusion caused by price discrepancies between trading prices on other markets after the NYSE official closing time, which is generally 4:00 p.m. ET, and the NYSE closing price upon completion of the auction, which can be after 4:00 p.m. ET.” It also reminds companies that they can refer to NYSE Connect for information about the timing of completion of closing auctions.
Excitement is growing among our editorial team for our “2024 Proxy Disclosure & 21st Annual Executive Compensation” Conferences. We cannot wait to meet in San Francisco and engage with you in person! Not to mention that we’ve got a terrific lineup of experienced speakers who will be addressing timely topics. With the SEC’s regulatory agenda continuing apace and no end in sight to the global, economic and political uncertainty we’ve faced in recent years, make sure you’re getting the guidance and knowledge you need (and expect from us!) through our conferences!
We hope many of you decide to join us in San Francisco on October 14 & 15. Our “early bird” deal for individual in-person registrations ends May 31st, so you need to act soon to take advantage of that rate. (Our early bird in-person Single Attendee Price is $1,750, which is discounted from the regular $2,195 rate!) If you can’t make it in person, we also offer a virtual option so you won’t miss out on the practical takeaways our speaker lineup will share, and we offer discounted rate options for groups of virtual attendees.
You can register now by visiting our online store or by calling us at 800-737-1271.
In mid-April, the DOJ launched a Pilot Program on Voluntary Self-Disclosure for Individuals — the latest in a string of sweeping DOJ policy changes aimed at encouraging voluntary disclosure of misconduct and holding the real “bad guys” accountable. We’ve previously covered those developments here, on CompensationStandards.com and on DealLawyers.com. Here are related DOJ announcements since early 2023, as a reminder:
While aimed at individual reporting, this latest pilot program is still focused on corporate wrongdoing. This DLA Piper alert addresses what GCs and compliance officers need to know and notes that this can be “an additional tool at their disposal to encourage their companies to invest in the development of trusted reporting channels and other compliance controls that prevent and detect misconduct – and allow the company to address, remediate, and disclose the misconduct, if appropriate – before an individual is incentivized to make reports outside of the company.”
DOJ’s message to companies is clear: Investing in building a culture of trust that rewards ethical behavior, and penalizes those who break the rules, is paramount. Further, if employees do not trust that their concerns will be taken seriously, addressed appropriately, and valued by the company, they may bring their concerns elsewhere – and the individual, not the company, will receive the benefit of the disclosure. These “sticks” also require companies to ensure they carefully assess when it may be appropriate to avail themselves of the DOJ’s incentives to come forward before their employees do.
If an individual engaged in misconduct but discloses and cooperates, they may receive a Non-Prosecution Agreement if certain criteria, detailed in the alert, are met. CEOs & CFOs do not qualify, and the Pilot Program will initially only apply to disclosures involving certain types of criminal conduct involving corporations:
1. Violations by financial institutions, their insiders, or agents, including money laundering, anti-money laundering, registration of money transmitting businesses, fraud statutes, and fraud against or compliance with financial institution regulators
2. Violations related to the integrity of financial markets undertaken by financial institutions, investment advisors, or investment funds by or through public companies or private companies with 50 or more employees, or by any insiders or agents of such entities
3. Violations by or through public or private companies related to foreign corruption and bribery, including violations of the Foreign Corrupt Practices Act, Foreign Extortion Prevention Act, and money laundering statutes
4. Violations by or through public or private companies with 50 or more employees related to healthcare fraud or illegal healthcare kickbacks committed
5. Violations by or through public or private companies with 50 or more employees related to fraud against, or deception of, the US in connection with federal contracts, and
6. Violations committed by or through public or private companies related to the payment or bribes or kickbacks to domestic public officials.
The alert concludes with action items for companies to consider beginning with reviewing existing compliance policies and procedures.
The memos started rolling in last week as after the FTC approved an expansive ban on the use of non-competes, with limited exceptions. As expected, at the end of the week, the US Chamber of Commerce filed suit in the U.S. District Court for the Eastern District of Texas challenging the rule.
As reported by HR Dive, the lawsuit argues that the FTC lacks authority to issue substantive regulations regarding unfair methods of competition, invokes the “major questions” doctrine and claims the ban is impermissibly retroactive — since the rule largely renders existing non-competes unenforceable, with an exception for “senior executives” as defined in the rule. This Simpson Thacher alert describes the potential timing for a decision:
The Court overseeing the Chamber’s lawsuit has set a schedule that would permit the Court to issue an order on the merits of the Chamber’s legal challenge before the Rule’s effective date. Assuming no changes to the schedule, the Court could therefore declare the Rule unlawful before the rule comes into effect.
The March-April Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This issue includes the following articles:
– Lessons From the Activision-Microsoft Merger – Delaware Chancery’s Moelis II Decision Provides Cautionary Tale for Boards and Activists – Sears and (the Limited Scope of) Controlling Stockholder Fiduciary Duties
– Delaware Chancery Reminds Us That Directors Generally May Not Share Confidential Information With Stockholders Who Nominated Them
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
On the Proxy Season Blog, I recently shared that Tesla has filed its preliminary proxy statement, and it includes a proposal requesting that shareholders ratify Musk’s 2018 pay package that the Delaware Chancery Court ordered rescinded. The blog shares some interesting tidbits from the disclosure, including that even Tesla isn’t sure how this ratification will be treated under Delaware law.
Filed less than three months after Musk previewed moving Tesla’s state of incorporation on X, the proxy also includes a proposal for redomestication. It notes that Tesla’s “outside directors as well as management had previously explored the possibility of a redomestication (though without coming to a decision one way or the other),” but begins the detailed description of the work done by the board, the special committee and its advisors with the February 4 board meeting after Musk’s social media post. Here are some highlights of the process description:
– The special committee was comprised of one member who was not on the board at the time of the 2018 grant. A second member had stepped down after the committee’s authority was expanded to include consideration of whether Musk’s 2018 award should be ratified.
– It engaged four special advisors — outside counsel, Delaware counsel, a corporate law and governance expert and a financial advisor.
– From its formation on February 10 to its final approval meeting on April 16, the special committee held 16 meetings that took more than 26 total hours and engaged in work outside meetings for more than 200 hours.
– That work included interviews of the seven other directors and five members of management, a visit to Tesla’s headquarters by counsel, a conversation with the external auditor and reviews of reports from a governance expert & financial advisor, numerous legal decisions, letters from stockholders, and academic articles.
– The proxy justifies the tight turnaround by saying that the committee assessed the timeline with its counsel, determined that the proposal should be considered at Tesla’s annual meeting for greater shareholder participation, and felt it took the time it needed since the company agreed to the special committee’s request to move the date of the annual meeting by a month after “negotiation over various potential dates.”
