If an officer exculpation charter amendment is on your agenda for this year’s annual meeting & you’ve got multiple classes of stock outstanding, I’ve got some good news for you. Last year, the Delaware Chancery Court held that companies with this capital structure didn’t have to hold a separate class vote on these charter amendments, and earlier this week, in In re Fox Corp./SNAP Inc. Section 242 Litigation, (Del.; 1/24), the Delaware Supreme Court affirmed that decision. This excerpt summarizes the court’s decision:
We affirm the Court of Chancery’s judgment. Based on long-standing precedent, which the Class A Stockholders have not asked us to overrule, the powers, preferences, or special rights of class shares in Section 242(b)(2) refers to the powers, preferences, or special rights authorized for a class by Section 151(a) and expressed in the charter as required by Sections 102(a)(4) and 151(a).
The powers, preferences, or special rights of class shares expressed in the charter include default provisions in the DGCL, which are part of every charter under Section 394. The ability to sue directors or officers for duty of care violations is an attribute of the Companies’ stock, but not a power, preference, or special right of the Class A common stock under Section 242(b)(2).
The annual Northwestern Securities Regulation Institute will be held next week in San Diego. I know that many of our members will be there and wanted to let you know that we’ll be there in force. Dave’s vice chairing the event, and Liz, Meredith & I will all be in attendance as well. We hope to have the chance to meet many of the members our community in person, so if you see us, please stop by and say hello!
We shouldn’t be hard to find – Dave will be at the podium, and if you’re looking for the rest of us, just keep your eyes peeled for two very professional looking young women standing next to an old guy who looks like Sir Topham Hatt.
A recent Morgan Lewis memo on white collar issues says that the DOJ is prioritizing corporate criminal enforcement for misconduct implicating national security issues. Here’s an excerpt:
Since the beginning of the Biden administration, the DOJ has loudly proclaimed an interest in increased corporate criminal enforcement in traditional white-collar spaces. However, in recent months, the DOJ has signaled an additional priority: corporate enforcement related to national security issues. In the fall of 2023, the DOJ announced the appointment of the National Security Division’s first chief counsel for corporate enforcement. Ian Richardson, a former federal prosecutor in the US District Court for the Eastern District of New York, was appointed to coordinate and oversee the prosecution of corporate crime relating to US national security. Additionally, Christian J. Nauvel was named as Deputy Chief Counsel for Corporate Enforcement.
Given some of the national security issues that have emerged in recent years, from trade secret theft to the visibility of non-state actors, the DOJ is looking for opportunities to send a message to companies that they need to crack down on misconduct that could have serious national security implications. The DOJ’s focus on national security extends to processes like the CFIUS regulatory process, which is focused on reviewing cross-border investments and not on criminal activity.
The memo says that this increased emphasis on enforcement means that the DOJ will likely increase the number of investigations and subpoenas, and that companies with activities in regions such as China, the Middle East, and Central Asia face the most significant risk of attracting the DOJ’s attention.
Many institutional investors have incessantly whined about vociferously objected to dual-class capital structures, which could be eliminated pretty quickly if they simply refused to invest in IPOs by companies that adopted them. Apparently, that’s not a viable alternative because of “FOMO” or something, but this excerpt from a recent Fenwick memo indicates that institutional investors’ “buy first, whine later” strategy doesn’t seem to be working very well, at least in Silicon Valley:
Adoption of dual-class voting stock structures has continued its more than decade long upward trend among Silicon Valley technology companies, reaching 29.3% of companies in the SV 150 in the 2023 proxy season. Historically, dual-class voting stock structures were significantly more common among S&P 100 companies than among the technology and life sciences companies in the SV 150, though the frequency in the SV 150 has surpassed that in the S&P 100 since 2015.
Other than the recent overall trend in the SV 150, the variation in the percentage of each group over time is primarily a function of changes in the constituents of each group. Within the SV 150, our data suggests that since 2018 there has been a steady increase in dual-class voting structures. That has been a function of companies such as Alphabet (Google), Meta (Facebook), Block (formerly Square), Airbnb, DoorDash, Lyft, Twilio, Zoom Video Communications, and Coinbase joining the SV 150 with dual-class structures.
The memo points out that from 2018 through 2022, 42% of tech companies that went public had a dual- class voting stock structure in place, and that investors expect the trend of companies going public with dual-class structures is likely to continue. That means the percentage of SV 150 companies with dual- class structures is likely to grow as well.
Check out our latest “Timely Takes” Podcast featuring Orrick’s J.T. Ho & his monthly update on securities & governance developments. In this installment, J.T. reviews:
– SEC’s Fall Reg Flex Agenda
– FBI & DOJ Guidance on Seeking Cyber Incident Reporting Delays
– SEC & Corp Fin Guidance on Cyber Incident Reporting Rules
– Israel-Hamas Disclosure Considerations
– ISS’s Updated Proxy Voting Guidelines and FAQs
As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email us at john@thecorporatecounsel.net or mervine@ccrcorp.com.
Today, the SCOTUS will hear oral arguments in two cases,Loper Bright Enterprises v. Raimondo and Relentless Inc. v. Dept. of Commerce, that present the question of whether the Court should overturn the 40-year-old “Chevron Doctrine,” which provides that when Congress implicitly delegates authority under a statute to an administrative agency, federal courts are required to defer to the agency’s reasonable interpretations of that statute.
Chevron deference has long been a prime target of conservative opponents of the “administrative state,” and they scored a big victory with the SCOTUS’s 2022 decision in West Virginia v. EPA, which narrowed the scope of Chevron by limiting administrative agencies’ ability to assert their authority over “major questions” absent a clear delegation of that authority from Congress. However, in this excerpt from the Solicitor General’s brief, the Biden Administration warns that overturning Chevron is a much bigger step, with potentially enormous consequences:
[O]verruling Chevron would be a convulsive shock to the legal system. All three Branches of government, regulated parties, and the public have arranged their affairs for decades with Chevron as the backdrop against which Congress legislates, agencies issue rules and orders, and courts resolve disputes about those agency actions. Given its central importance, overruling Chevron would threaten substantial disruption in federal programs such as Social Security and would upset settled expectations in virtually every area of federal law. And if Chevron were overruled, the federal courts would inevitably be required to resolve policy questions properly left to the “political branch[es].”
As a practical matter, Columbia Prof. Thomas Merrill observes that overturning Chevron would be a recipe for judicial gridlock when it comes to resolving challenges to agency actions: “If every court of appeals were required to apply de novo review to every question of law that arises in a regulatory context, the courts of appeals would be overwhelmed.” On the other hand, advocates of overturning the doctrine argue that it violates the Administrative Procedure Act, has no constitutional basis and has licensed Congress to pass vague laws delegating authority to administrative agencies (hmm. . . what laws could they possibly be thinking of?).
Whatever side you think has the better of the argument, it seems fair to say that the SCOTUS’s decision in these cases has the potential to make sweeping changes in the way federal regulatory agencies operate and the role that the federal courts play in overseeing their actions. If you’re interested in listening to oral arguments in the cases, you can tune in here for a live feed.
I think most people who follow corporate governance issue are well aware that support for ESG-related shareholder proposals by major asset managers has declined in recent years, but I’m not sure that people fully appreciate that when it comes to the Big 4, their level of support hasn’t just declined – it’s fallen off a cliff. Here’s an excerpt from a recent report by ShareAction:
The four largest asset managers in the world dominate the sector, holding 39% of the total assets under management (AuM) of all 69 managers we analysed. The ‘big four’ have shown a significant and consistent decline in their support for shareholder resolutions seeking corporate improvements on important environmental and social issues, supporting – on average – one eighth of resolutions in 2023.
BlackRock, the largest asset manager in the world, only supported 8% of environmental and social shareholder resolutions in 2023, whereas in 2021 it had supported 40% of such resolutions. Vanguard, the world’s second largest asset manager, showed the weakest performance of the ‘big four’, supporting only 3% of resolutions in 2023.
All four asset managers voted significantly more conservatively than advised by the leading proxy voting advisors, ISS and Glass Lewis.
The departures from ISS & Glass Lewis’s recommendations are particularly striking. According to ShareAction, ISS recommended yes on nearly 80% of ESG proposals last year, and Glass Lewis recommended yes on about 35%. In contrast, State Street, which was the most supportive of the Big 4 when it came to 2023 ESG proposals, only voted in favor of about 25% of them.
Liz has previously blogged about BlackRock’s explanation for its overall lower levels of support for shareholder proposals in 2023, and Larry Fink mumbled something that might be relevant to this topic last summer, but whatever the reason, it looks like ESG proponents will continue to have a tough time getting traction on their proposals during the upcoming proxy season.
Join us tomorrow at 2 pm eastern for our “ISS Forecast for 2024 Proxy Season” webcast to hear ISS’s Marc Goldstein, Davis Polk’s Ning Chiu & Sustainable Governance Partners’ Rob Main discuss what transpired during the 2023 proxy season and what steps companies can take to prepare for 2024.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE which require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
The beneficial ownership reporting requirements of the Corporate Transparency Act went into effect on January 1, 2024. As we’ve previously blogged, regulations under the Act require every foreign or domestic legal entity that qualifies as a “reporting company” to file reports with FinCEN that identify the entity’s beneficial owners. Entities formed after January 1, 2024, will also have to identify the individuals who have filed to form or register the entity in question.
Those individuals involved in the filing process are referred to under the regulations as “company applicants” and they include up to two people: the person who directly files the document that creates or registers the company and, if more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing. FinCEN recently issued a set of FAQs providing guidance on who qualifies as a company applicant. The 1st FAQ on this topic says the following:
For the purposes of determining who is a company applicant, it is not relevant who signs the creation or registration document, for example, as an incorporator. To determine who is primarily responsible for directing or controlling the filing of the document, consider who is responsible for making the decisions about the filing of the document, such as how the filing is managed, what content the document includes, and when and where the filing occurs.
I’m guessing that many folks didn’t expect the interpretation to cast this wide a net – and yes, FinCEN makes it clear that it’s looking to rope the lawyers involved in the process as company applicants, as this example from the FAQ illustrates:
Scenario 1: Consider an attorney who completes a company creation document using information provided by a client, and then sends the document to a corporate service provider for filing with a secretary of state. In this example:
The attorney is the company applicant who is primarily responsible for directing or controlling the filing because they prepared the creation document and directed the corporate service provider to file it.
The individual at the corporate service provider is the company applicant who directly filed the document with the secretary of state.
Okay, I’m guessing this result comes as an unpleasant surprise to a lot of lawyers who probably didn’t expect to find themselves in this position. But you ain’t seen nothin’ yet! The 2nd FAQ addresses what happens if you use a third-party delivery service to file your company creation docs with a secretary of state – and makes it clear that the paralegal you’ve handed the filing process off to is now also a company applicant:
For example, an attorney at a law firm may be involved in the preparation of incorporation documents. The attorney directs a paralegal to file the documents. The paralegal may then request a third-party delivery service to deliver the incorporation documents to the secretary of state’s office. The paralegal is the company applicant who directly files the documents, even though the third-party delivery service delivered the documents on the paralegal’s behalf. The attorney at the law firm who was involved in the preparation of the incorporation documents and who directed the paralegal to file the documents will also be a company applicant because the attorney was primarily responsible for directing or controlling the filing of the documents.
Now, roping in the paralegal seems excessive to me, but the next nugget of interpretive guidance marks the spot where FinCEN interpretive position morphs into a full-blown bureaucratic fever dream. Here’s what happens if you use one of your law firm’s messengers to file a company creation document with a secretary of state:
For example, a mailroom employee at a law firm may physically deliver the document that creates a reporting company at the direction of an attorney at the law firm who is primarily responsible for decisions related to the filing. Both individuals are company applicants.
Yup, you read that right. That kid who wanders around the office with the mail cart or picks up the lunch order for your corporate department meeting has to be identified in a FinCEN filing. This may seem, well, kind of insane, but I’m sure FinCEN firmly believes that if that kid isn’t named as a company applicant, the terrorists win.
Last week’s compromise of SEC’s X social media account continues to attract attention from the agency, federal law enforcement and – oh goodie! – Congress. On Friday, SEC Chair Gary Gensler issued a statement on the matter, and this excerpt summarizes the SEC’s current understanding of what happened:
Based on current information, staff understands that, shortly after 4:00 pm ET on Tuesday, January 9, 2024, an unauthorized party gained access to the @SECGov X.com account by obtaining control over the phone number associated with the account. The unauthorized party made one post at 4:11 pm ET purporting to announce the Commission’s approval of spot bitcoin exchange-traded funds, as well as a second post approximately two minutes later that said “$BTC.” The unauthorized party subsequently deleted the second post, but not the first. Using the @SECGov account, the unauthorized party also liked two posts by non-SEC accounts. While SEC staff is still assessing the scope of the incident, there is currently no evidence that the unauthorized party gained access to SEC systems, data, devices, or other social media accounts.
The statement notes that the SEC continues to assess the impacts of the hack but acknowledges that “those impacts include concerns about the security of the SEC’s social media accounts.” It goes on to state that the SEC is coordinating with an alphabet soup of federal law enforcement and oversight agencies, including its own Office of the Inspector General, the FBI, DHS and CISA.
In what may be the least surprising news of the week, politicians were quick to arrive at the scene. First out of the gate were senators J.D. Vance (R-OH) and Thom Tillis (R-NC), who lobbed in this letter to Chair Gensler on the day the incident became public characterizing it as a “colossal error” and requesting a briefing. On Thursday, senators Ron Wyden (D-OR) and Cynthia Lummis (R-WY) followed up with a letter to the SEC’s OIG criticizing the agency’s failure to adhere to cybersecurity best practices and calling for the OIG to provide the senators with an update on its investigation and the SEC’s remediation efforts by February 24th.
