Barker-Gilmore recently released its 2024 Aspiring General Counsel Report. Among other things, the report notes that if you want to be a GC, it sure helps to be anointed as a potential successor by your company’s management. According to the report, management-identified successors receive professional development in the form of expanded responsibilities, increased board exposure, leadership training and “stretch” assignments at higher rates than their peers generally. Here are some of the report’s other findings:
– 42% of Managing Counsel and 11% of Senior Counsel report being identified by management as potential successors to the sitting General Counsel.
– Being identified as a potential successor is more likely to keep Senior Counsel (60%) from pursuing other opportunities than it is for Managing Counsel (42%).
– In-house counsel that have received executive coaching (35%) are more likely to be identified as a successor than their counterparts without executive coaching (26%).
– Most identified successors are currently Deputy General Counsel (58%)
– 23% of potential successors identify as a race or ethnicity other than “white.”
The report also found that women are slightly more likely to be identified as a successor than men (53% vs. 47%), and that women are most likely to have been identified as a potential successor in the consumer (75%), industrial/manufacturing (60%) and financial services (56%) industries.
Allianz has issued its 13th annual “risk barometer,” which identifies the top 10 risks for the upcoming year based on a survey of 3,069 respondents from 92 countries including Allianz customers, brokers, industry trade organizations, risk consultants, underwriters, senior managers, claims experts, as well as other risk management professionals in the corporate insurance segment.
“Cyber incidents” tops the list again after taking the top spot last year, but for the first time by a clear margin and across all company sizes. The report described AI’s contributions to increasing cyber threats:
AI adoption brings numerous opportunities and benefits, but also risk. Threat actors are already using AI-powered language models like ChatGPT to write code. Generative AI can help less proficient threat actors create new strains and variations of existing ransomware, potentially increasing the number of attacks they can execute. An increased utilization of AI by malicious actors in the future is to be expected, necessitating even stronger cyber security measures.
Voice simulation software has already become a powerful addition to the cyber criminal’s arsenal. Meanwhile, deepfake video technology designed and sold for phishing frauds can also now be found online, for prices as low as $20 per minute.
ICYMI, even your annual meeting isn’t safe! On other happy topics, “business interruption” (including supply chain disruption), which has frequently been a top risk in years past, is now at no. 2 followed by “natural catastrophes.” I promise my intention was not to disrupt your sleep tonight when I started writing this blog…
Sometimes there’s no specific 8-K item triggered and no item where disclosure neatly fits, but a company wants to get certain information out there and turns to Item 7.01 or 8.01. This general scenario is not new, but this Cleary alert suggests 7.01 or 8.01 might be more frequently utilized when companies discover cybersecurity incidents but have yet to make a materiality determination. As Dave recently blogged, “the Titanic effect is real in many cybersecurity breaches, in that one can easily misperceive that the giant iceberg lurking under the surface is just some harmless floating ice,” and the SEC will be looking at disclosures with the benefit of hindsight. Here’s an excerpt from Cleary’s alert:
Given the number of moving pieces and factors to consider, it is likely that it may take some time to reach a definitive conclusion around materiality for any given cybersecurity incident. If a registrant waits until it has come to a final conclusion around materiality, a significant amount of time may have passed since the initial discovery of the incident.
The SEC has been extremely focused on the timeliness of disclosure of cybersecurity incidents, and while an incident may appear to be immaterial for some period of time and non-disclosure at that time would be technically compliant with the disclosure rules, if the incident is later determined to be material, there is likely to be a tremendous amount of scrutiny around the timing of that determination. As a result, registrants will want to think carefully about the potential benefits of putting out disclosure on Form 8-K under Item 7.01 (Regulation FD Disclosure) or Item 8.01 (Other Events) (and/or in a press release or other Regulation FD-compliant channel) promptly after discovering a cybersecurity incident, while the materiality of the incident is still under consideration (including if they do not believe the incident will likely be deemed material).
The alert describes a number of potential benefits of using this approach initially:
[T]here is no preemptive concession by the registrant of the event’s materiality in a potential future litigation or otherwise. In some circumstances, disclosure more quickly than the usual four day Form 8-K deadline will be appropriate.
We have seen an increasing number of registrants adopt this practice, even ahead of the Item 1.05 requirement becoming effective, and believe it can be an effective communication tool, while also mitigating regulatory and other risk. By disclosing early, a registrant will give itself some breathing room to come to a materiality determination in an expeditious but methodical way that considers all necessary factors. In addition, providing prompt disclosure may provide some protection from stock-drop lawsuits following a potential later announcement that the incident has been determined to be material.
Additionally, registrants may need to alert and provide ongoing updates to certain external stakeholders. For example, registrants may need to coordinate logistics with vendors if their systems are inaccessible, or may be unable to meet their immediate obligations to customers due to production or operational issues. These types of issues will necessitate real-time engagement with impacted constituencies. Putting out public disclosure will facilitate this dialogue and alleviate any concerns around claims of selective disclosure in violation of Regulation FD.
It concludes this point by saying that this practice is expected to continue but “[w]hether Item 7.01 or Item 8.01 is appropriate (the latter of which carries with it an implicit element of materiality and is filed, not furnished) will be a facts and circumstances determination.”
We blogged last June about how corporate communications by public company employees may need to be retained due to generally applicable statutory recordkeeping obligations and that guidance from March clarified that the DOJ expects all companies to maintain and enforce policies to ensure that all “business-related” electronic data and communications are preserved. Ephemeral messaging and off-channel communications got a lot of attention this summer after the SEC settled numerous enforcement actions with broker-dealers and investment advisers. And, in fact, this blog was perfectly timed since the SEC announced a new sweep this morning.
A new development in late January underscores the dangers of business use of ephemeral messaging and off-channel communications beyond the broker-dealer and investment adviser space. The DOJ and FTC announced an update to their preservation notices and instructions for responding to discovery, and the FTC stated that it may even refer cases to criminal prosecutors when companies fail to preserve documents covered by an FTC investigation or action.
This Nelson Mullins alert says the added preservation language clarifies that preservation responsibilities extend to new methods of collaboration, defines “Collaborative Work Environments” and “Messaging Applications” and outlines in detail information that needs to be provided regarding policies and procedures for retention and destruction of documents, including “chats, instant messages, text messages, and other methods of communication.” The language will apply to second requests, voluntary access letters, and compulsory legal processes. The platforms mentioned in the updated guidance include Slack, Microsoft Teams and Signal, but the alert notes that it also covers any other collaboration tools or platforms used, plus social media accounts like X, Facebook, or Snapchat. The alert gives this example:
[I]f a company involved in a merger becomes aware that a second request will be issued but fails to suspend the “auto delete” function of its Microsoft Teams collaboration platform, it may find itself in hot water that runs deeper than the substance of the merger investigation itself.
– Consider implementing policies to prevent employees from using unapproved apps or personal accounts for business communications
– “Only approve platforms that give IT personnel admin-level control over data retention settings” rather than any that would permit employees to control their own data-retention settings
– Take steps to ensure data will be retained as soon as a litigation or investigation hold is issued on all necessary platforms, including by disabling any autodelete features immediately
Vanguard has issued its 2024 voting policies, which are now effective (for meetings held after February 1st) and apply to Vanguard-advised funds. This Alliance Advisors post discusses key updates and says: “Overall, Vanguard has enhanced its disclosure expectations related to board composition and provided more details on its approach to executive compensation programs, advance notice requirements and exclusive forum provisions.” Here’s an excerpt from the alert:
– Board and committee independence: Vanguard is relaxing its majority independence standard for the entire board at controlled companies (those in which a majority interest is held by company insiders or affiliates). However, it expects a majority of key committee members at controlled companies to be independent.
– Board composition: Vanguard has added a new section to its guidelines on board composition that replaces its discussion on diversity and qualifications disclosure. Vanguard looks to companies to disclose their perspectives on the appropriate board structure and composition and how these elements support the firm’s strategy, long-term performance and shareholder returns. It wants issuers to provide regular disclosure regarding their director nomination process, their process for evaluating board composition and effectiveness, and their identification of gaps and opportunities to be addressed through board refreshment and evolution. Vanguard expects disclosure of each director’s tenure, skills and experience in a skills matrix. Disclosure of directors’ personal characteristics (such as gender, race and ethnicity) may be done on an aggregate or individual director level.
– Escalation process for director and committee accountability: In certain instances, Vanguard will vote against directors as a means of expressing concern regarding governance failings or other issues that are unaddressed by a company. It has eased its policy of penalizing boards for not making sufficient progress on board diversity. Instead, absent a compelling reason, Vanguard will vote against the nominating/governance committee chair, or another relevant board member, if the board is not taking action to achieve board composition that is appropriately representative, relative to its market and the needs of its long-term strategy.
The summary also describes some clarifications or expanded discussions of poison pills, advance notice bylaws and exclusive forum provisions.
Over on the CompensationStandards.com blog yesterday, Liz shared tweaks made to Vanguard’s case-by-case approach to compensation-related ballot items (including say-on-pay). As she reminded readers, Wellington makes voting decisions for some Vanguard funds and also released its policies (see the full policies and a summary of changes on Wellington’s policy portal). And, as always, you now also need to keep track of policies that apply when investors are using “proxy voting choice.”
Yes, voting choice complicates things, but at least the proxy advisors and institutional investors seem to have mostly gone easier on public companies with their policy updates this season (knock on wood). I wonder how often descriptions of these summaries in prior years have used phrases like “relaxing its majority independence standard” or “eased its policy.” And, looking at how we’ve characterized other policy updates this season, we’ve used words like “a holiday miracle” and “a few reasonable updates.”
Our readers know that Delaware forum selection clauses have been enforced by courts in many states since Delaware Chancery’s 2013 decision in Boilermakers v. Chevron. Recently, the developments we’ve covered relating to forum selection have involved whether bylaws providing an exclusive forum for bringing claims under the Securities Act or the Exchange Act were permissible. The latest development is a bit different, although I can’t say unexpected, since Allen Matkin’s Keith Bishop predicted it just over a decade ago!
Last fall, Keith blogged about EPICENTERx, Inc. v. Superior Court (Cal. Ct. Appeal, 9/23) in which California’s Fourth District Court of Appeal refused to enforce the forum selection clause “in a Delaware corporation’s corporate documents” since it “would operate as an implied waiver of the plaintiff’s right to a jury trial—a constitutionally-protected right that cannot be waived by contract prior to the commencement of a dispute.”
This Sidley blog gives further background on the issue and explains that California is an outlier, although “other state courts could follow California’s approach.”
In California, forum selection clauses are typically enforced unless doing so would be unfair or unreasonable. But California courts will refuse enforcement if litigating in the selected forum would violate public policy. Normally the burden of proof to prove why the clause should not be enforced falls on the party opposing enforcement. Under California statutes, however, the burden is reversed when the issue bears on unwaivable rights. The right to a jury trial has been deemed “fundamental,” “inviolate,” and “sacred.” The Delaware Court of Chancery, as a court of equity, does not conduct jury trials. Therefore, the defendants must demonstrate that litigating in the Delaware Court of Chancery would not substantially diminish rights under California law. […]
California is an outlier in rejecting the enforcement of a Delaware Court of Chancery forum selection clause that is included in corporate documents. Most other state courts enforce Delaware forum selection clauses. Like California, nearly all state constitutions recognize the right to a jury trial. Yet California and Georgia appear to have the only courts that have expressly prohibited pre-dispute jury waivers. California courts point to the state’s constitution and Code of Civil Procedure that outlines only six actions that may waive the right to a jury trial, which do not include pre-dispute waivers, to demonstrate that forum selection clauses may not be enforced when they infringe upon such rights.
As Liz announced at our 2023 Conferences, we are absolutely thrilled that our 2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences will be back in person! Since we lawyers are big planners, synchronize your (smart) watches for Operation 2024 Conferences & plug October 14 to 15 into your calendar.
We’ll gather in San Francisco to learn, plan for proxy season and commiserate (in person!) about our shared struggles. For extra credit, sign up here to be the first to get all the details. Or look out for future blogs about early bird registration and “sneak peeks” of topics & speakers.
And if you can’t make it in person, don’t panic! We will also offer a virtual option so you won’t miss out on the practical guidance our always excellent speaker lineup will share with attendees.
The transition to a T+1 settlement cycle pursuant to SEC Rule 15c6-1(a) will occur on May 28, 2024. The NYSE will adopt new rules to reflect regular way settlement as occurring on a T+1 basis and also will change the Exchange’s rules with respect to ex-dividend and ex-rights trading. Ex-dividend trading dates will be set during the transition period as follows:
– securities paying a dividend with a record date of May 28 will be traded ex-dividend on May 24; and
– securities paying a dividend with a record date of May 29 will be traded ex-dividend on May 29.
The Memo reminds listed issuers, to the extent practicable, to avoid consummation of corporate actions during the time of transition from T+2 to T+1.
In response to listed company inquiries, NYSE’s annual Listed Company Compliance Guidance letter also includes a reminder to debt-only issuers that they, too, are required to adopt a clawback policy. Here’s an excerpt:
In adopting Rule 10D-1, […] the SEC did not provide any such exemption for issuers whose only listed securities are debt securities, including issuers of debt securities guaranteed by a parent company whose common equity securities are typically listed on the Exchange. In response to inquiries from listed companies and their advisors, NYSE Regulation has sought clarification from the SEC regarding the treatment of debt-only issuers under Rule 10D-1 and Section 303A.14.
As a result of those conversations, NYSE Regulation confirms that all debt only issuers listed on the NYSE are required to adopt a Recovery Policy, including, without limitation, those with guarantees from listed parents and those that are exempt from disclosure requirements pursuant to Exchange Act Rule 12h-5. To the extent an issuer has not put in place relevant procedures, it is out of compliance with NYSE rules.
This Davis Polk memo from a few weeks ago has more on this and explains the mechanics (or lack thereof) for some debt-only issuers.
A subsidiary of a public company (including an operating company or finance subsidiary) can itself be the issuer of debt securities or a guarantor of debt securities issued by its parent company. […] Under SEC rules, where the parent guarantees the debt, the subsidiary is exempt from ongoing SEC reporting (in accordance with Rule 12h-5 under the Securities Exchange Act of 1934), and the parent reporting company is not required to provide separate financial statements to the SEC for the subsidiary (in accordance with the exemption under Rule 3-10 of Regulation S-X). […] Subsidiary securities are sometimes listed on an exchange.
Subsidiaries with listed securities should adopt a clawback policy to comply with the listing standards. The good news is that under both NYSE and Nasdaq listing standards, if the subsidiary is not itself subject to SEC financial reporting requirements, there should be no events that would trigger recovery of compensation under the policy.
This is because under the clawback rules, recovery of compensation is only triggered by a financial restatement that the issuer is required to prepare due to the issuer’s (i.e., the subsidiary’s) material noncompliance with financial reporting requirements under the U.S. federal securities laws. If the subsidiary issuer is not subject to such financial reporting requirements, then it should never be required to prepare a restatement due to material noncompliance with such financial reporting requirements.
The memo goes on to say that the clawback policy “could simply state that the parent company’s clawback policy applies to the subsidiary” and even includes a sample resolution that could be adapted for this purpose as an annex. Finally, it clarifies that, for any such subsidiary that does not file an annual report on Form 10-K, Form 20-F or Form 40-F, there would be no need to file the clawback policy as an exhibit.
A few weeks ago over on the Proxy Season Blog, Liz blogged about Exxon’s decision to take two shareholder proposal proponents to court over a “Scope 3” proposal and request a declaratory judgment that it could exclude the proposal from its proxy statement. Liz noted how unusual this “direct-to-court” strategy is — since shareholder proposals are non-binding, often don’t pass and there’s the option of seeking an SEC no-action letter. But she gave this background:
Back in 2017, one of the first climate proposals to receive majority shareholder approval was a request for a “2-degree scenario” analysis, which passed at ExxonMobil with 62% support. This emboldened proponents and gave credibility to the notion that investors want climate information. Looking back, it was one of the developments that launched the “E&S” tsunami. Over the ensuing 7 years, the volume of shareholder proposals increased to record numbers. Companies have been spending time, money, and energy on responding to proposals, negotiating with proponents, discussing the issues with institutional holders, and requesting no-action relief from the SEC.
The complaint, excerpted below, cites the difficulty in obtaining SEC no-action relief under current guidance:
The plain language of Rule 14a-8 supports excluding the 2024 Proposal, but current guidance by SEC staff about how to apply the rule can be at odds with the rule itself. Even though that guidance has no legal force or effect, Defendants and other similar activist organizations rely on it to pursue their personal preferences at the expense of shareholders. ExxonMobil seeks declaratory relief from this Court to stop this misuse of the current system.
On Monday, Liz shared that the proponents have now backed off by withdrawing their proposal (and promising not to refile it). But Exxon has not done the same. Here’s an excerpt from this Reuters article:
Exxon said it would continue with the suit, which questions the motivations of the investors and notes the rising number of resolutions being filed for corporate ballots.
“We believe there are still important issues for the court to resolve. There is no change to our plans, the suit is continuing,” Exxon said in an emailed statement.
In addition to seeking approval to skip a vote on the resolution, Exxon had sought attorneys’ fees and expenses and that the court enter “other and further relief as the Court may deem just and proper.”
This will be closely watched litigation that we’ll generally cover on our Proxy Season Blog where we continue to regularly post new items for TheCorporateCounsel.net members. Members can sign up to get that blog pushed via email whenever there is a new post. If you do not have access to the Proxy Season Blog or all the other great resources on TheCorporateCounsel.net, sign up today.
