It’s still too early to tell whether universal proxy is significantly changing the activism game, but it may at least be influencing smaller activists to move forward with campaigns. Here’s something that Meredith blogged yesterday on DealLawyers.com:
Michael Levin recently shared another UPC development – the second activist success story:
An individual investor, Daniel Mangless, owns 2.3% of Zevra Therapeutics (ZVRA), since 2019. Other than a few Form 13Gs for ZVRA and one other holding, the preliminary proxy statement for ZVRA was his first-ever SEC filing and, it appears, activist project.
He rather quietly nominated three candidates for three available seats on the seven-person classified BoD. ZVRA nominated the three incumbents, including the CEO and a director first appointed in November 2022. He also proposed reversing any bylaw amendments from 2023, which the ZVRA BoD could have approved but not disclosed to shareholders.
At the ASM last week, all three challengers won by a significant margin over the three incumbents. The bylaw amendment reversal also prevailed by a similar margin.
What’s a significant margin? All three activists won 80% of the votes cast, with the bylaw proposal passing with 84% of the vote. So, while UPC may have helped encourage the activist, it doesn’t appear to have impacted the outcome:
Shareholders didn’t see the need to split votes among incumbent and activist candidates, one of the features of UPC. All three challengers each received approximately the same votes, as did the three incumbents.
The other notable feature of this campaign was the activist’s particularly low expenses, estimated at $250,000.
I blogged earlier this week about a record-setting whistleblower award. A case that’s on the SCOTUS docket may affect the ability of future whistleblowers to establish claims. Here’s Kevin LaCroix at D&O Diary:
The U.S. Supreme Court has agreed to take up a case that will address the question of whether or not a claimant alleging that his employer fired him in retaliation for whistleblowing must prove that the employer acted with retaliatory intent. The court’s consideration of the case has important implications for claimants under the Sarbanes-Oxley Act’s anti-retaliation provisions, because claimants could face significantly greater difficulty in establishing their claims if they must prove that the employer acted with subjective intent to retaliate. The case could also have important implications for retaliation claims under other federal whistleblower protection laws. The Court’s May 1, 2023, order agreeing to take up the case can be found here.
Kevin gives background on the case & the cert petition, and discusses the potential impact:
The Second Circuit’s requirement of a showing of retaliatory intent “significantly raised the threshold for Sarbanes-Oxley whistleblower plaintiffs,” as the Seyfarth Shaw law firm put it in a memo published just after the Second Circuit issued its opinion. As the memo also noted, “a potentially significant number of cases will not meet the requirement” for the claimant to show retaliatory intent.
Moreover, this case not only has important implications for SOX whistleblowers; a number of other federal statutory provisions have anti-retaliation provisions that operate similarly to the provisions in SOX. As Senators Grassley and Widen put it in their amicus brief, at least 17 other federal statutes have “virtually identical whistleblower protection” provision, and so the Second Circuit’s holding, if not addressed, could significantly affect the level of protection available under a variety of whistleblower statutes.
The Supreme Court will hear argument on the case in the fall and it will likely issue its ruling in the case in early 2024. The case will be interesting to watch as it could significantly affect the difficulty for whistleblower plaintiffs to establish claims that they were retaliated against for the whistleblower activities.
When it comes to the big award that the SEC announced last week, the Financial Times Alphaville has a “low-confidence bet” that it was tied to the WhatsApp probe, which also happened to be the subject of an SEC announcement yesterday, and Bloomberg reported that the SEC is continuing to investigate “off-channel communications” at other brokers.
Last week, State Street Corporation announced three new publicly available data sets that will show portfolio allocation trends among large institutional investors. Here’s more detail:
– The Institutional Investor Holdings Indicator tracks the aggregate holdings of institutional investors across three asset classes: stocks, bonds and cash. Shifts in asset allocations convey information about how investors view the economy and their outlook for markets. When investors are bullish on markets, they tend to hold more stocks; when they are bearish, they tend to hold more cash and bonds. The Holdings Indicator is calculated daily and will be released monthly.
– Institutional Investor Risk Appetite Indicator is based on flows—buying and selling activity—rather than portfolio positions. It reveals whether investors, in aggregate, are buying or selling risky assets. For example, selling less risky bond or stock investments to buy riskier ones would drive up this score. While the Holdings Indicator tells us about current positioning, the Risk Appetite Indicator tells us about the direction of travel. The Risk Appetite Indicator is calculated daily and will be released monthly.
– The State Street S&P Global Institutional Investor Carbon Indicator tracks the overall exposure of institutional investor portfolio holdings to carbon emissions. Leveraging aggregated and anonymized custody and accounting data from State Street, together carbon emissions data from S&P Global powered by S&P Global Sustainble1, the indicator will show how institutional investors are managing their exposure to carbon risk, and what is driving shifts in these exposures. The Carbon Indicator will be released annually.
The tracker for carbon emissions is useful for anyone attempting to understand & predict investor behaviors on that topic, because it is a data-based alternative to the various polls & surveys that float around from time to time. In fact, State Street has already used the data for a new report – which shows that from March 2022 – March 2023, investors’ emissions exposures increased, while intensity exposures fell.
I don’t know whether that outcome was something investors were intentionally striving for, but it shows how complex and nuanced asset allocation is during this time of the energy transition – versus just “woke” or “not woke.” Here are the highlights from the study (also see this ESG Today article):
• The carbon emission exposures of institutional portfolios rose in between March 2022 and March 2023, returning to levels higher than any seen since 2019: portfolio companies emitted more carbon overall with emissions exposure rising over 8% from 3.93 to 4.27 million metric tonnes year over year.
• The efficiency with which portfolios leverage carbon emissions to generate revenues, however, increased, with carbon intensity exposure falling over 10% from 152 to 137 tonnes emitted per $1 million of revenue. These contrasting moves represent, respectively a sharp reversal in the trend of declining exposures and a continuation of the trend in efficiency gains that we observed between March 2018 and March 2021. The low emissions exposures of 2020 and 2021 were driven in part by global declines in emissions due to COVID restrictions, and these have reversed as the economy has recovered.
• From March 2022 to March 2023, high-carbon sectors, such as Energy, outperformed the overall market as oil prices remained elevated. These companies performed well even as the regulatory price of emissions rose in Europe.1 As a result of these higher valuations, Energy holdings represented a larger share of many institutional portfolios; this repricing was the main driver of increased weighted-average carbon emissions exposure at the portfolio level, while the general post-COVID renewal of economic activity accompanied increased emissions by Energy, Materials, and Utilities firms. The decrease in intensity exposure was driven by Energy and Materials companies – in this case by their reductions in company carbon intensity as firms grew revenues faster than emissions.
• Despite the fact that carbon-intensive sectors like Energy outperformed the market in 2022, many sophisticated decarbonization strategies also outperformed. This seeming paradox is due to the fact that sophisticated decarbonization strategies hold sector weights neutral and tilt toward more carbon efficient firms within each sector. For example, they might hold overall exposure to the Energy sector constant, but tilt toward more efficient emitters within that sector. As a result, they can benefit when energy prices rise since they are tilted toward companies that use energy more efficiently.
The DOJ announced this week that a former product manager at Coinbase has been sentenced to 2 years in federal prison for sharing confidential company info about token listings with his brother & friend so that they could trade in those tokens. Although the charges were unique because they were the first-ever insider trading case involving crypto and gave us an early sign that the SEC was going to take a harder stance on tokens being securities, this case also has ramifications for companies and employees in any industry – because it shows the harsh consequences that can result from insider trading.
A 2-year stint in federal prison is nothing to sneeze at. This Bloomberg article further highlights that prosecutors are out for blood, and details the parade of horribles that can accompany an insider trading conviction, in addition to jail time:
“This error in judgment has cost him everything: his career, his health, his relationships, his family’s name, and has seriously jeopardized the future of his relationship with his long-term girlfriend,” Wahi’s lawyer, David Miller, wrote in a sentencing memo. “Ishan has squandered years of hard study in school, tireless years of professional development, and forfeited his ability to work in what was a promising and lucrative career.”
Prosecutors sought a sentence of 37 to 46 months behind bars, the same amount called for by federal guidelines, saying that giving him just 10 months would send the wrong message.
Earlier this year, I blogged about a guilty plea & 10-month prison sentence for one of the tippees in this case. Last week, a former exec at a different company was convicted in an insider trading case involving NFTs.
With many companies taking a fresh look at insider trading policies and training programs right now, this sentence can serve as a reminder to insiders about why it’s important to follow the policy. See our “Insider Trading Policies Handbook” for an updated model policy and lots of practical guidance.
A recent study from a Marquette finance prof examines trends in Reg A offerings post-JOBS Act. This is useful since one of the goals of the JOBS Act was to make Regulation A a more viable option for capital raising by smaller companies, by significantly raising the maximum offering size and turning it into what became known as “Reg A+”.
The study shows that Reg A has become more popular since the JOBS Act was enacted. The number of qualified filings increased from an average of eight per year before the Act to over 160 annually in 2022. However – possibly due to continued perception of high offering costs, or just a general lack of awareness – Reg A is still an underdog when it comes to capital raising alternatives.
The study provides some insights & trends on qualification that may help anyone considering this route, and suggests ways that policy-makers can continue to help Reg A be all that it can be. Here are a few key data points, from this CLS summary:
– Number of Filings per Year: The number of filings increased over time (especially Tier 2 offerings), with a peak of 274 filings in 2021 (see Figure 2). (Tier 1 Reg A offerings allow companies to raise up to $20 million in a 12-month period, while Tier 2 Reg A offerings allow companies to raise up to $75 million in a 12-month period, but also have additional disclosure requirements and ongoing reporting obligations.)
– Percentage of Qualified Offerings by Year: The percentage of offerings qualified by the SEC increased from 39 percent in 2015 to 78 percent in 2022.
– Offering Size Distribution of Qualified Offerings: The average offering size of qualified offerings was $22 million, with a range of $1.5 million to $75 million. Larger offerings were positively associated with SEC qualification, indicating that issuers who align their offering size with their financial fundamentals are more likely to obtain SEC qualification.
– Use of Professional Advisers in the Registration Process: The use of professional advisers, such as lawyers and accountants, was positively associated with SEC qualification. Issuers who engage professional advisors earlier in the process likely signal a higher level of competency to the SEC.
– Industry Distribution of Qualified Offerings: The technology sector had the highest number of qualified offerings, followed by healthcare and consumer goods.
Last week, on the heels of the “42nd Annual Small Business Forum,” the SEC announced that it had appointed 14 new members to its Small Business Capital Formation Advisory Committee. These new members are filling vacancies arising primarily from the expiration of prior members’ terms – but since the entire Committee is only 20 people and several of them are non-voting government representatives, this represents turnover of all but 2 “at-large” positions. Dave blogged about the nominations process earlier this year.
The Committee meets quarterly and provides advice and recommendations to the Commission on rules, regulations, and policy matters relating to small businesses, including smaller public companies. Members include entrepreneurs, investors, and advisers who work with early stage private companies and smaller public companies – as well as the SEC’s Advocate for Small Business Capital Formation and three non-voting members appointed by each of the SEC’s Investor Advocate, the North American Securities Administrators Association (NASAA), and the Small Business Administration, as well as an observer appointed by the Financial Industry Regulatory Authority (FINRA).
The departing members shared these “parting thoughts” back in February, which urged the SEC to make it easier and more efficient for companies to raise capital regardless of geographic location (i.e., encourage growth in “flyover country”) – and to continue to pay attention to these 5 objectives:
1. Recognize the importance of the private markets for small business growth.
2. Ensure public company rules are mindful of the unique circumstances of small public companies, so that these small companies can attract capital, spur innovation, and create jobs.
3. Allow retail investors greater access to a wider range of investment opportunities.
4. Support rules to facilitate the existence and growth of small funds.
5. Continue to protect investors through effective enforcement and more education and outreach.
At the recent Spring Meeting of the ABA’s Business Law Section, Corp Fin Chief Counsel Michael Seaman noted that the height of “shareholder proposal season” has concluded, from the Staff’s perspective. Michael shared these stats:
– The Staff was asked to respond to 177 no-action requests this year. That’s a significant drop from last season where the Staff reviewed 235 requests.
– This year, the Staff granted 46% of those requests, and that’s an increase from around 30% last year. 35% percent of the requests were denied and about 20% were withdrawn.
– 14a-8(i)(7) – the “ordinary business” exclusion – was the most frequent basis that the companies have asserted in their no action requests, and that is typical every year.
– This year, “procedural” requests were up significantly (requesting no-action relief on the basis of requirements like ownership, providing the company with dates and times to meet with them to discuss the proposal, etc.). Last year, the Staff saw 42 procedural requests. This year, there were 53 – despite the lower number of overall requests.
When it comes to the meaning behind these numbers, we can’t know for sure what goes on behind closed doors at every company receiving shareholder proposals, but the numbers track with the sentiment that I blogged about earlier this year: that 2023 is “The Year of the Compromise.” Even as the number of proposals submitted by proponents has remained high, companies recognize that the path to no-action relief is challenging under SLB 14L, and may have been more judicious in submitting requests to Corp Fin (instead, negotiating with proponents could be the better approach). And, the no-action requests that were submitted may have been stronger due to the increased level of vetting at the decision-making stage. As we all know, it is all very case-by-case.
For procedural requirements, Michael emphasized that “proof of delivery” – whether or not a proposal was received or responded to – has become an important issue in the age of email correspondence. Here are a couple of reminders that can help save time & headaches:
– The Staff’s no-action responses this year make it clear that things like taking a screenshot of an email that you sent somebody is not proof of delivery. Make sure to review SLB 14L for guidance on proof of delivery in the email context.
– Generally speaking, companies and proponents owe it to one another to confirm receipt by email of any message received from the other side. If you have sent a message and don’t get a receipt, then follow up.
Here’s something Meredith blogged yesterday on CompensationStandards.com, where we are covering clawback policy requirements in detail:
The SEC’s recent designation of a longer period for taking action on proposed listing standards to implement Dodd-Frank clawback rules left companies who haven’t yet adopted a compliant policy unsure whether to jump on this now using the listing rules proposed in February, or whether to wait in hopes that additional time may be forthcoming. This FW Cook blog clarifies that clawbacks should be on your summer to-do list. Here’s an excerpt:
An April 24, 2023 SEC release (see here: link), while somewhat ambiguous, could be read to suggest that the SEC would not take action before June 11, 2023, although leaving open the possibility of a later approval date.
Recent conversations between SEC staff and executive compensation practitioners suggest that the SEC is leaning toward treating June 11, 2023 as the date for final action (actually, June 9 since June 11 is a Sunday). While practitioners have strongly lobbied for the SEC to delay action until the absolute deadline of November 28, 2023, the SEC so far appears unpersuaded, at least in part because of procedural reasons referenced in the April 24, 2023 release.
Given the substantial chance the SEC will approve the listing standards no later than June 9, 2023, this means a new policy would have to be in place by August 8, 2023 (i.e., 60 days later). Even though drafting a compliant policy may be relatively straightforward, seeking Board/committee review and approval over the summer could be challenging from a practical perspective. There are many boards and committees that don’t meet in the June/August period, so waiting until the SEC has acted may result in the need for special unanticipated actions, either through special meetings or possibly unanimous written consents.
Dust off your flip flops and your employment agreements, equity plans, deferred compensation plans and existing clawback policies since, as Morgan Lewis describes in this alert, there’s a lot to consider. The good news is that we have more resources, including multiple models of a Dodd-Frank-compliant policy, in our “Clawbacks” Practice Area on CompensationStandards.com. Plus, we’ve extended our June 27th webcast on that site “Proxy Season Post-Mortem: The Latest Compensation Disclosures” by an additional 30 minutes to bring you the latest on clawback policies from our expert panel: Mark Borges, Principal at Compensia and Editor of CompensationStandards.com, Dave Lynn, Partner at Morrison Foerster and Senior Editor of TheCorporateCounsel.net and CompensationStandards.com and Ron Mueller, Partner at Gibson Dunn & Crutcher LLP.
If you attend the live version of this 90-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of CompensationStandards.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. 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. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.
Wachtell Lipton recently published an updated version of its longstanding “Audit Committee Guide.” The 2023 edition weighs in at 212 pages. Here’s an excerpt about the audit committee’s role in risk management – a topic that’s taken on heightened importance due to market fluctuations, regulatory enforcement initiatives, and today’s complex & interconnected business environment:
The board should implement a coordinated approach toward risk oversight and ensure an effective flow of information among the directors, senior management and risk managers in order to satisfy itself as to the adequacy of the risk oversight function and to understand the company’s overall risk exposures. Given the NYSE requirement, if a company oversees some or all risk management through a structure that uses a board committee other than the audit committee, these processes should nonetheless be reviewed in a general manner by the audit committee (but the risk management function of such other committee need not be replaced or duplicated by the audit committee).
If a company charges the audit committee with overseeing risk management, the audit committee should schedule time in its agenda for periodic reviews of risk management outside the context of its role in reviewing financial statements and accounting compliance. The audit committee should also hold sessions in which it meets directly with key executives primarily responsible for risk management and compliance programs. In light of the Caremark standard discussed below (see Chapter XI: “Audit Committee Member Liability Issues”), an audit committee charged with overseeing risk management should feel comfortable that “red flags” and “yellow flags” are being reported to it so that key risks may be investigated and reported to the board if appropriate.
It is important to build a record demonstrating allocation of sufficient time and focus to the risk oversight role. The goal should be to provide, through one means or another, serious and thoughtful board-level attention to the company’s risk management process and system. Further, in light of a recent Delaware holding that corporate officers may be held liable for breach of the duty of oversight, as discussed below (see Chapter XI: “Audit Committee Member Liability Issues”), the board committee tasked with overseeing risk management should take steps to ensure that officers are implementing appropriate corporate controls and addressing issues as necessary.
In addition to an overview of best practices, the Guide includes Model Charters, a Model Audit Committee Responsibilities Checklist, a Model Audit Committee Member Financial Expertise and Independence Questionnaire, a Model Audit Committee Pre-Approval Policy, Model Policies and Procedures with respect to Related Person Transactions, Model Whistleblower Procedures and a Model Audit Committee Self-Evaluation Checklist, and more – which can be modified to fit specific company situations.
This resource is posted along with heaps of other helpful resources in our “Audit Committees” Practice Area. If you aren’t already a member of TheCorporateCounsel.net, start a “no-risk trial” today! 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. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.
We’ve been getting a lot of questions about when to expect the SEC’s final climate disclosure rule. The short answer is we don’t know for sure. A new “Reg Flex” agenda is coming soon – and while that only reflects priorities of the Chair and general timeframes (not precise dates), it will shed some light on where things stand (or, at least, “stood” – as of April 10th – which is when the Staff submitted the info for the Unified Agenda).
At the spring meeting of the ABA Business Law Section a couple of weeks ago, Corp Fin Director Erik Gerding noted that the Staff is still engaged in the very important step of reviewing the thousands of comment letters that were submitted in response to the proposal – with greenhouse gas emissions and the Reg S-X thresholds for certain line item disclosure requirements being a couple of the top items that require careful consideration.
An additional piece of context, which Lawrence blogged about yesterday on PracticalESG.com, could be the potential interplay with EU rules. Although the notion of aligning with established reporting protocols was a theme in comment letters submitted on the SEC proposal, more issues are coming into focus as the EU regime moves forward. Here’s an excerpt from Lawrence’s blog:
One slight surprise might be new interplay between the EU Corporate Sustainability Reporting Directive (CSRD) and SEC’s proposal. The Wall Street Journal wrote that the EU indicated they may waive at least some aspects of CSRD requirements for US companies if the SEC’s final requirements “are rigorous enough.” Alignment between the two disclosure mandates would certainly be beneficial and reduce the reporting burden on US multinationals, so it makes sense that the SEC would consider the door that now appears to be open.
Yet this development may not be welcome news to everyone. Previous rumors indicated that the SEC’s support for Scope 3 emissions determinations and reporting may have been fading after consideration of the 15,000 comments submitted on the proposal. There were building expectations that the final release would not include Scope 3 requirements. However, the EU disclosure requirement includes Scope 3, so SEC’s final rule would have to address Scope 3 in a manner meaningful enough for the EU to consider it equivalent. Given that, it seems likely that Scope 3 may be back on the menu for US companies.
The WSJ – with Refinitiv data – estimates that the EU sustainability rules will affect 10k non-EU companies, about a third of which are US-based. Former SEC Commissioner Rob Jackson recently speculated that whatever the Commission and Staff are sorting through with respect to the final rule, it may take until autumn to figure it out…which, as Dave blogged last week, is also when the Supreme Court will be considering a case that could affect SEC rulemaking authority.
