March 21, 2023

BlackRock’s Letter to Shareholders: Sign of the Times

Two years ago, I wrote that anticipating Larry Fink’s annual letter to CEOs, a 10-year tradition which typically has arrived in January, was like waiting for Moses to come down from the mountain. He softened his tone last year. Now, it’s apparent a “vibe shift” has arrived. Mr. Fink has finally made it clear…in March…that this year, there will be no pontificating to CEOs. At least, not as directly as in years past.

Instead, he’s sticking to updating BlackRock’s investors – via an 18-page letter published last week. That hasn’t stopped corporate folks from poring over his commentary for hints on how the world’s largest asset manager might vote at annual meetings this year, and what its priorities will be.

The term “ESG” doesn’t appear anywhere in the letter. That’s a sign of the times since that terminology, and investors’ involvement in encouraging ESG disclosures, has become a lightning rod for politicians (and wannabe politicians). However, it would be a bridge to far to declare that this means that ESG has been “cancelled” or that BlackRock has given up on long-term, sustainable value creation. The letter still gives plenty of play to the importance of solid corporate governance in the midst of evolving risks & opportunities – e.g., talking about the “price of easy money” in the wake of recent financial industry issues, and how that compares to BlackRock’s strong returns. The asset manager’s co-founder, Chair & CEO is also still continuing to beat the “climate transition” drum, although that message keeps getting refined away from directing portfolio companies what to do and towards how this is a choice for BlackRock’s investor clients:

Better data is essential. More than half of the companies in the S&P 500 now voluntarily report Scope 1 and Scope 2 emissions. I expect that number will continue to rise. But as I have said consistently over many years now, it is for governments to make policy and enact legislation, and not for companies, including asset managers, to be the environmental police.

Transition toward lower carbon emissions will reflect the regulatory and legislative choices governments make to balance the need for secure, reliable and affordable energy with orderly decarbonization.

We know that the transition will not be a straight line. Different countries and industries will move at different speeds, and oil and gas will play a vital role in meeting global energy demands through that journey. Many of our clients see the investment opportunities that will come as established energy companies adapt their businesses. They recognize the vital role energy companies will play in ensuring energy security and a successful energy transition.

He goes on:

Some of the most attractive investment opportunities in the years ahead will be in the transition finance space. Given its importance to our clients, BlackRock’s ambition is to be the leading investor in these opportunities on their behalf.

I wrote last year that the next 1,000 unicorns won’t be search engines or social media companies. Many of them will be sustainable, scalable innovators – startups that help the world decarbonize and make the energy transition affordable for all consumers. I still believe that. For clients who choose, we’re connecting them with these investment opportunities.

The letter also touts BlackRock’s new “voting choice” initiative and has this to say about stewardship activities:

Making these decisions requires understanding how companies are responding to evolving risks and opportunities. Changes in globalization, supply chains, geopolitics, inflation, monetary and fiscal policy, and climate all can impact a company’s ability to deliver durable value. Our stewardship team works to promote better investment performance for our clients, the asset owners. The team does that by understanding how a company is responding to these factors where financially material to the company’s business, and by advocating for sound governance and business practices. For many of our clients who have entrusted us with this important responsibility, BlackRock’s stewardship efforts are core to what they are seeking from us.

At the same time, we believe that adding more voices to corporate governance can further strengthen shareholder democracy. But democracy only works when people are informed and engaged. As more asset owners choose to direct their own votes, they need to make sure they are investing the time and resources to make informed decisions on critical governance issues. Proxy advisors can play an important role. But if asset owners rely too much on a few proxy advisors, then their voice may fall short of its potential. I certainly believe that the industry would benefit from more proxy advisors who can add diversity of views on shareholder issues.

Amid these shifts, companies will also need to find new ways to reach their shareholders who choose to direct their own votes, and robust disclosures and advances in the proxy ecosystem will become even more important.

I blogged about BlackRock’s 2023 voting guidelines a few months ago. If they’re a big shareholder at your company, make sure to review those and their “Global Principles” as you head into annual meeting season.

Liz Dunshee

March 21, 2023

Tender Offers: SEC Builds Out Tender Offer Rules & Schedules CDIs

Here’s an update from John’s blog yesterday (make sure to connect with him at Tulane if you’ll be there this week!):

On Friday, Corp Fin finished its long-awaited build-out of the Tender Offer Rules & Schedules CDIs by issuing 34 CDIs addressing a wide range of interpretive issues.  As anyone who’s ever researched tender offers knows, most of the Staff’s guidance has been scattered across the old Telephone Interps & other locations on the SEC’s website, with only a handful of topics addressed in the CDIs.  All of that guidance has finally been consolidated into a single location. The intro to the page provides some insight into where all of the new CDIs came from:

These Compliance and Disclosure Interpretations (“C&DIs”) comprise the Division’s interpretations of the tender offer rules. Many of the C&DIs replace the interpretations previously published in the Tender Offer Rules and Schedules Manual of Publicly Available Telephone Interpretations, Excerpt from November 2000 Current Issues Outline, and Excerpt from March 2001 Quarterly Update to Current Issues Outline (namely, C&DIs 101.05 through 101.16; 104.01; 104.02; 130.01 through 130.03; 131.01 through 131.03; 144.01; 146.01; 149.01; 158.01; 161.01; 162.06; 162.07; 163.01; 164.01; and 181.01). C&DI 101.04 replaces Question 2 in the Schedule TO section of the July 2001 Interim Supplement to Publicly Available Telephone Interpretations.

As this Gibson Dunn blog points out, there’s not a lot that’s new here in terms of substantive guidance.  Still, there’s so much that’s new to this page on the SEC’s website that I think you may find this version that I dug up from the Internet Archive showing what the page looked like before Friday’s changes helpful.  Members of can also access this redlined copy of the CDIs that I posted in our “Tender Offers” Practice Area.

By the way, I know that many of our readers will be in attendance at the Tulane Corporate Law Institute later this week. I’ll be there as well and hope to have a chance to meet you during the conference.  I’m easy to find – just look for a guy who appears to be a cross between Butterbean & Sir Topham Hatt!

Liz Dunshee

March 20, 2023

Non-GAAP: New SEC Enforcement Action Spotlights Disclosure Controls

It’s been a couple years since we’ve had a non-GAAP enforcement action. Last week, the SEC reminded us that they’re still watching for problems. The Commission announced charges against a company for allegedly misleading disclosures about its non-GAAP financial performance in multiple reporting periods from 2018 until early 2020.

One of the things that got the company in trouble was allegedly failing to adopt disclosure controls & procedures specific to non-GAAP measures. The SEC says that led to misclassifications of excluded expenses and misleading disclosures of what exactly had been excluded. Here’s more detail from the 11-page order (also see this Cooley blog):

The company also had insufficient processes to ensure that its business practices for classifying costs as TSI were consistent with the plain meaning of the company’s own description of those costs in its periodic reports filed with the Commission and in its earnings releases. The absence of a non-GAAP policy and specific disclosure controls and procedures caused employees within the business units and in the Financial Planning & Analysis area (“FP&A”) to make subjective determinations about whether expenses were related to an actual or contemplated transaction, regardless of whether the costs were actually consistent with the description of the adjustment included in the company’s public disclosures. As a result, the company negligently misclassified certain internal labor costs, data center relocation costs that were unrelated to the merger, and other expenses as TSI costs.

Without admitting or denying the findings in the order, the company consented to a cease-and-desist order, to pay an $8 million penalty, and to undertake to develop and implement appropriate non-GAAP policies and disclosure controls and procedures. The SEC considered the company’s cooperation and remedial actions in accepting the settlement offer.

I blogged a few weeks ago that “disclosure controls” enforcement actions are trending. We all need to pay attention to the link between disclosure controls & disclosure content – including for voluntary disclosures – because the SEC certainly is doing that. As Lawrence noted last week on, the SEC’s interest in whether companies are accurately explaining what makes up the information they’re providing could also translate to scrutiny of ESG disclosure controls in the future.

John Jenkins

March 20, 2023

DOJ: Credit For Strong Compliance Programs

On the criminal enforcement front, I blogged last week on that the DOJ has provided important guidance on a new pilot program that could reduce criminal fines for companies that are able to show that they’ve clawed back incentives from employees who were involved in the misconduct. Companies can also get credit for showing compliance-related compensation incentives, which this Gibson Dunn memo says could include:

– A prohibition on bonuses for employees who do not satisfy compliance performance requirements;

– Disciplinary measures for employees who violate applicable law and others who both (a) had supervisory authority over the employee(s) or business area engaged in the misconduct, and (b) knew of, or were willfully blind to, the misconduct; and

– Incentives for employees who demonstrate full commitment to compliance processes.

In addition, the DOJ updated guidance on corporate monitorships, employee personal devices & use of messaging platforms. The DOJ also continues to emphasize that it may give leniency when companies fully cooperate with investigations and remediate the problems, which John blogged about earlier this year. We’re posting memos about what the DOJ is looking for in our “Compliance Programs” Practice Area.

Liz Dunshee

March 20, 2023

Tomorrow’s Webcast: “Managing Enterprise-Wide Risks: The Intersection of ERM & Legal”

Tune in tomorrow at 2pm Eastern for the webcast – “Managing Enterprise-Wide Risks: The Intersection of ERM & Legal” – to hear Orrick’s J.T. Ho, Tesla’s Derek Windham, NetScout’s Jeff Levinson, American Express’s Ming-Hsuan Elders, and WestRock’s Stephanie Bignon discuss the role of the legal department in enterprise risk management, how ERM differs from traditional risk management, what you need to consider when implementing an ERM program, the SEC’s focus on ERM disclosures, and the relationship between ERM & ESG.

This program is very timely not only in light of recent Delaware court decisions – but also because it comes as companies are navigating banking industry issues that may affect corporate financing, risk & decision-making. Don’t miss it!

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 – or call us at 800.737.1271.

CLE credit is available! We will apply for CLE credit in all applicable states (with the exception of SC and NE who require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program. 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.

Liz Dunshee

March 17, 2023

ISS Launches New Global Board-Aligned Voting Policy

This week, ISS released its Global Board-Aligned U.S. Voting Guidelines and Global Board-Aligned International Voting Guidelines. ISS describes these new guidelines as follows:

The new policy is designed to provide subscribing investors with analyses and recommendations that enable them to vote in a manner that upholds foundational corporate governance principles as a means of protecting and maximizing their investments, while generally aligning with the recommendations of company boards on proposals with an environmental or social focus.

Released to coincide with the start of the 2023 annual shareholder meeting season in most major global markets, the Global Board-Aligned Policy will enable subscribing institutions to focus their voting on widely accepted standards of good corporate governance and the protection of shareholder rights.

On matters of corporate governance, executive compensation, and corporate structure, the Global Board-Aligned Policy guidelines are also focused on the creation and preservation of economic value. On environmental or social matters, the Global Board-Aligned Policy will generally result in recommendations that are in line with those of a company’s board, with recommendations in support of shareholder proposals limited to circumstances where it is considered that greater disclosure will directly enhance or protect shareholder value and is reflective of a clearly established reporting standard in the market.

The new voting guidelines differ from the standard benchmark voting guidelines in that specific policies for voting on environmental and social issues are replaced with the following approach:

Environmental and social proposals will be reviewed with a focus on how, and to what extent, the issues dealt with in such proposals will directly affect shareholder value, and with a presumption on environmental and social topics that the board’s recommendations should generally prevail. In those circumstances where it is widely considered that greater disclosure will directly enhance or protect shareholder value and is reflective of a clearly established reporting standard in the market, the Global Board-Aligned Policy will generally recommend in support of such proposals (e.g. proposals requesting greater disclosure of a company’s political contributions and/or trade association spending policies and activities). In the absence of a clear determination that environmental and social proposals will have a positive effect on shareholder value or there are proposals that seek information that exceeds a widely endorsed standard in the market or place any burden upon the company beyond a reasonable and clearly established reporting standard in the market, the Global Board-Aligned policy will generally recommend voting against such proposals, or in line with the board’s recommendations if different.

Specific policies are retained for say-on-climate proposals, noting that ISS will generally recommend a vote for the board’s recommendation on management say-on-climate proposals and will generally recommend a vote against say-on-climate shareholder proposals, in each case rather than evaluating them on a case-by-case basis.

As this Reuters article notes, this new policy resulted from discussions that ISS had with pension funds in Republican-leaning states that invest internationally and could not use an existing U.S.-focused version of the voting policy guidelines. As Liz noted in the Proxy Season Blog last month, earlier this year ISS and Glass Lewis received letters from 21 State Attorney Generals claiming that their climate & DEI proxy voting policies and recommendations violate contractual obligations and legal duties under federal and state laws.

– Dave Lynn

March 17, 2023

The Evolving ESG Landscape in the States

If you had come from the future and told me a couple years ago that ISS would be releasing voting guidelines that stripped out its carefully crafted approach to a wide array of ESG proposals, I would not have believed you. But such is the world that we live in today. As this Simpson Thacher alert notes, state legislatures have been extremely active in all manner of ESG-related lawmaking, ranging from anti-ESG measures to ESG-neutral measures to even pro-ESG measures.

Earlier this year, John recounted the progress of some of the anti-ESG efforts, as well as the cracks that were beginning to appear in the anti-ESG movement. The Simpson Thacher alert notes how efforts to push back on anti-ESG measures have been successful in some cases, but the wave of legislation seems to continue pushing forward in other jurisdictions. It appears that the intensity of both the anti-ESG efforts and the pro-ESG efforts will only ramp up as we enter the 2024 Presidential election cycle, as ESG will undoubtedly be a key differentiator in the parties’ platforms.

– Dave Lynn

March 17, 2023

Happy St. Patrick’s Day!

On a lighter note, as a person of Irish descent (growing up, I was always fascinated my maternal grandfather’s brogue), I would like to wish everyone a happy St. Patrick’s Day, and I hope you are able to celebrate whatever it is that we celebrate on this day!

The occasion gives me an opportunity to tell what I think is my only St. Patrick-related story. When my family was traveling in Ireland many years ago, we were visiting the beautiful Cliffs of Moher on the west coast, and we were walking from the cliffs to the car park. A family was coming along the path the other way, and their young son was walking in the flora that grew along the side of the path, so his mother said in a very American accent “Billy, get out of those weeds, there are probably snakes in there.” To this comment I responded indignantly, in my very best fake Irish accent, “Madam, there are no snakes in Ireland, thanks to our beloved St. Patrick.” The American woman mistook me for a local and told her son “its OK Billy, he says there are no snakes in there.” I have no idea why I was being so cheeky that day, perhaps it was the lingering effects of the blarney stone!

– Dave Lynn

March 16, 2023

Could Syndicated Loans Be Securities?

The enduring regulatory drama over digital assets has focused much attention these past few years on the definition of “security” in the Securities Act and the Exchange Act and the largely judge-made interpretive gloss which outlines the boundaries of that definition. But whether something is a security continues to come up in other contexts, and one recent case being considered by the Second Circuit Court of Appeals revisits the almost sacrosanct conclusion that syndicated loans are not securities. If such loans were deemed to be securities, that could up-end the $2.5 trillion syndicated loan market.

In this Troutman Pepper piece, they note that last Thursday the Second Circuit heard oral arguments in the appeal of Kirschner v. JPMorgan Chase Bank, N.A. The lower court had determined that the syndicated loans in question were not securities, analyzing the question by applying the four-factor “family resemblance” test first articulated by the Supreme Court in Reves v. Ernst & Young. That test presumes that every note is a security other than certain enumerated categories of notes and notes bearing a strong family resemblance to one of those categories. After providing key takeaways from the oral arguments, the Troutman Pepper piece notes:

Regulations, like those applicable to high-yield bonds, entail extra risk. Regulations also carry administrative burdens and costs arising from compliance issues. If loans were securities, investors would pass on these risks and costs to borrowers in the form of higher pricing, stricter terms, and narrower access to capital. These changes would upset the reasonable, settled expectation of market participants that loans as an asset class are not regulated securities, and would lead to inefficiencies in the market.

The Second Circuit panel seemed resistant to interfere with the syndicated loan market where the SEC and federal regulators had to date been unwilling to do so. Although the panel questioned whether the size of the market called for greater scrutiny, the panel implied that regulators could step in if they wanted to do so, and in their absence, sophisticated investors have participated in the market on the basis of this lack of regulation, without the need for Securities Act protections.

The Second Circuit is expected to issue an opinion soon.

– Dave Lynn

March 16, 2023

More PVP Observations

The early observations about pay versus performance disclosure have been rolling in, which are providing a useful overview of the trends for those filers who are still working on their disclosures. In this blog post from equitymethods, the observations are based on 36 companies that have provided the disclosure as of March 3, 2023. These tended to be larger filers with a majority having over $1 billion in market capitalization. The blog post notes the top five areas of risk gleaned from the sample:

1. Failing to provide Item 402(v)(5) relationship disclosures altogether
2. Omitting one of the required Item 402(v)(5) relationship disclosures (such as the company TSR to peer TSR comparison)
3. Adding supplemental disclosure that violates the requirement that any supplemental disclosure be clearly labeled as supplemental, not be made more prominent than the required disclosure, and not be misleading
4. Including a non-financial measure in the Tabular List prior to providing three financial measures (e.g., there are two financial measures and one non-financial measure)
5. Using an Item 201(e) peer group that is a broad market index and therefore falls within Item 201(e)(1)(i) but not the requirement that it fall within Item 201(e)(1)(ii), which excludes any broad market index

The blog post also notes that some filers omitted the granular equity calculations required and many filers did not provide much disclosure about assumptions.

– Dave Lynn