Many Delaware companies are considering asking stockholders to approve officer exculpation charter amendments this proxy season. If you’re working with one of them, be sure to check out this Freshfields blog, which reviews how these amendment proposals have fared with stockholders and proxy advisors and addresses several other matters that should be considered by boards thinking about officer exculpation amendments.
Overall, these proposals have been well received by stockholders. Of the 14 submitted to stockholders so far for which results were disclosed, only three failed – and two of those involved companies that required supermajorities to adopt charter amendments. This excerpt indicates that one reason for this success may be how proxy advisors, and ISS in particular, have responded to these proposals.
Of the 15 companies, ISS recommended FOR the proposals at all companies except for two companies. Both of the AGAINST recommendations involved unusual facts. The first of these two companies did not release a proxy statement (or disclose results) and ISS recommended against all proposals on the ballot. The other was holding a meeting to vote on its de-SPAC transaction, which ISS opposed along with every other proposal on the agenda for the meeting.
For the remaining 13 companies, ISS recommended FOR the exculpation amendment proposal each time. This group that garnered ISS endorsements for their exculpation amendment proposals included companies with less than perfect records on governance and even some where ISS was recommending against the company’s director nominees and/or say-on-pay proposals.
The blog notes that while ISS’s voting guidelines provide that its recommendations on exculpation proposals will be made on a case-by-case basis, taking into account the stated rationale for the vote, in practice, it has generally been supportive of officer exculpation proposals. Glass-Lewis’s voting guidelines appear less accommodating toward officer exculpation that ISS’s. However, the blog says that the high level of support for these proposals suggests that if Glass-Lewis is recommending against them, those recommendations aren’t having much influence on the outcome of the vote.
I think Broc – who is the biggest basketball fan I know – would be annoyed with me if I let the SEC’s recent anti-touting enforcement action against former Celtics star Paul Pierce pass without a mention on this blog. The SEC’s order in this settled proceeding alleges that Pierce’s promotional activities for EMAX tokens ran afoul of Section 17(b) of the Securities Act’s prohibition on touting. Here’s an excerpt from the SEC’s press release:
The SEC’s order finds that Pierce failed to disclose that he was paid more than $244,000 worth of EMAX tokens to promote the tokens on Twitter. The SEC’s order also finds that Pierce tweeted misleading statements related to EMAX, including tweeting a screenshot of an account showing large holdings and profits without disclosing that his own personal holdings were in fact much lower than those in the screenshot. In addition, one of Pierce’s tweets contained a link to the EthereumMax website, which provided instructions for potential investors to purchase EMAX tokens.
Without admitting or denying the SEC’s allegations, Pierce agreed to pay a $1,115,000 penalty and approximately $240,000 in disgorgement. He also agreed to not promote any crypto securities for three years.
This Holland & Knight blog reviews the SEC’s action against Pierce and discusses other celebrities who’ve found themselves targeted by the SEC for alleged touting violations. It also offers up some guidance on avoiding similar situations, and says that crypto’s uncertain status makes it particularly important to watch your step when it comes to promotional activities:
The lack of specific guidance on the issue of “crypto as security” leaves any paid promotional activity of coins or tokens by celebrities, athletes and other influencers vulnerable to an SEC investigation, enforcement action or class-action lawsuit. The risk has only increased as the SEC’s Division of Enforcement has expanded its focus beyond coins and tokens to paid promotional activity in connection with certain NFT (non-fungible token) promotions.
A recent ruling by the U.S. District Court for the Southern District of New York denying a motion to dismiss in connection with a complaint alleging certain NFTs are securities will only add fuel to the flames of this growing fire.14 When in doubt, parties should give careful consideration to proactively disclosing any and all compensation received in connection with any promotional activity involving digital assets.
Great advice, but while it would be wise for our nation’s celebrities to show a little caution here, I still bet it won’t be long until more find themselves in the SEC’s crosshairs for touting. After all, a lot of these folks seem to believe that “Fortune favors the brave.”
The January-February Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This month’s issue includes the following articles:
– Delaware Court Addresses Freeze-Out Merger Confronted with Topping Bid
– Tortious Interference Claims in M&A: Deal Jumping
– Bandera Master Fund: Delaware Supreme Court Defers to General Partner’s Contractual Authority
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without in order to keep up with the rapid-fire developments in the world of M&A. If you’re not a subscriber to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
It sounds like such a simple thing, doesn’t it? You include a bunch of proposals in your proxy statement, and for each proposal, Item 21 of Schedule 14A requires you to disclose the vote required for approval, the method by which votes will be counted, including the treatment and effect of abstentions, broker non-votes, and, to the extent applicable, a “withhold” vote for a nominee in an election of directors. Unfortunately, as generations of lawyers have learned, getting this disclosure right is often far from an easy process.
That’s the bad news. The good news is that this recent Goodwin memo is a very helpful resource for navigating the intricacies of determining and disclosing required votes in your proxy statement. This excerpt addresses the sometimes murky question of whether a particular proposal is “routine” or “non-routine” under NYSE rules:
Although not required by Item 21 of Schedule 14A, as a result of litigation in Delaware, we believe it is appropriate for proxy statements to identify, to the extent possible, which matters up for vote are considered routine (and therefore eligible for broker discretionary voting) and which are considered non-routine.
This is a straightforward exercise for many matters: NYSE Rule 452 explicitly provides that election of directors, say-on-pay, say-on-frequency, adoption or amendments of an equity plan, and shareholder proposals opposed by management are non-routine. In addition, the NYSE has expressed the view that ratification of the selection of independent auditors is routine.
Other matters may be less clear, and the determination is ultimately made by the NYSE. In this regard, companies should check with the NYSE to determine whether a particular matter is routine or non-routine prior to filing the proxy statement with the SEC.
The memo also addresses the need for companies to review state law and their charter documents in order to determine the vote required to approve a particular proposal, quorum requirements and the impact of broker non-votes and abstentions under various voting standards.
With the SEC’s adoption of cybersecurity and climate change disclosure rules looming and intensifying investor scrutiny of disclosure in these areas, this Perkins Coie blog recommends that companies take a hard look at their disclosure controls and procedures to ensure that cyber & ESG matters are appropriately captured. The blog identifies things that companies should keep in mind as they assess their disclosure controls & procedures in these areas. This excerpt addresses key issues in the data collection and verification process:
Determine what data to collect. Companies must determine what data to capture, and until the exact parameters of the final rules are known, should focus on the data most material to their business and industry. Companies can consider industrywide standards or metrics and whether key investors have preferred reporting frameworks. For example, BlackRock asks companies to report using the framework developed by the TCFD, supported by industry-specific metrics, such as those identified by SASB.
Establish data-gathering procedures and systems. Companies need to establish procedures for how data will be collected, where it is sourced, and how it is stored. Company personnel will need to be assigned responsibility over newly implemented procedures and data collection. Depending on the size and complexity of the data to be gathered, automated data management systems offer advantages over manual collection and storage methods. If companies intend to seek third-party assurance over their data, the procedures and systems need to be of sufficient quality and formality to enable testing by third parties.
Determine how data and resulting disclosures will be reviewed and verified. Companies must put in place procedures to vet the completeness and accuracy of the data collected and resulting disclosures. For example, internal controls and segregation of duties should be implemented to prevent and detect data fraud; also, certification and/or sub-certification procedures can be established whereby company personnel review and certify disclosures pertaining to their respective areas of responsibility. At the end of the day, the data and disclosures should be comparable across time, across communication channels (e.g., Form 10-K vs CSR Report), and amongst peers.
The blog says that companies should consider involving outside advisors such as audit firms and consultants in order to help them design internal controls and procedures or to provide assurance services, and should also assess whether any current disclosure committee needs to be reorganized in order to manage the increased challenges of these expanding disclosure obligations.
The SEC appears to be on a hiring spree these days. I recently noted on the DealLawyers.com Blog that the SEC was seeking to hire someone to serve as the Chief of Corp Fin’s Office of Mergers & Acquisitions. Now, the SEC is seeking to fill open spots in Corp Fin’s Office of Chief Counsel, where Dave used to lead the Division’s interpretive function. Dave notes:
The SEC has posted two announcements on the USAJobs website for open positions in Corp Fin’s Office of Chief Counsel. One of the announcements describes the general responsibilities for someone serving in the Office of Chief Counsel, while the second announcement seeks a candidate who has experience with compensation and employee benefit plan issues that arise under the securities laws.
I always say that the time I spent in OCC was the highlight of my career – no where else can you encounter so many questions about every aspect of the laws regulating capital raising and public disclosure. In the old days, getting a position in OCC was usually only possible by rising through the ranks in Corp Fin, so it is great that the Division is now posting these positions for candidates from the outside. For any securities lawyers out there who are considering a new challenge, I encourage you to consider these rare opportunities quickly – the postings close on March 14th.
Big news on the “insider trading” front. Earlier this week, the SEC announced that it had filed a civil complaint against the CEO & Chair of a healthcare company for his allegedly improper use of a Rule 10b5-1 trading plan. The SEC is seeking a jury trial in California. In addition, the DOJ announced parallel criminal charges and unsealed a grand jury’s indictment. Whoa! From the DOJ’s press release:
According to court documents, between May and August 2021, Peizer, 63, a resident of Puerto Rico and Santa Monica, California, allegedly avoided more than $12.5 million in losses by entering into two Rule 10b5-1 trading plans while in possession of material, nonpublic information concerning the serious risk that Ontrak’s then-largest customer would terminate its contract.
In May 2021, Peizer allegedly entered into his first 10b5-1 trading plan shortly after learning that the relationship between Ontrak and the customer was deteriorating and that the customer had expressed serious reservations about continuing its contract with Ontrak. The indictment alleges that Peizer later learned that the customer informed Ontrak of its intent to terminate the contract. Then, in August 2021, Peizer allegedly entered into his second 10b5-1 trading plan approximately one hour after Ontrak’s chief negotiator for the contract confirmed to Peizer that the contract likely would be terminated.
In establishing his 10b5-1 plans, Peizer allegedly refused to engage in any “cooling-off” period – the time between when he entered into the plan and when he sold stock – despite warnings from two brokers. Instead, Peizer allegedly began selling shares of Ontrak on the next trading day after establishing each plan. On Aug. 19, 2021, just six days after Peizer adopted his August 10b5-1 plan, Ontrak announced that the customer had terminated its contract and Ontrak’s stock price declined by more than 44%.
If convicted, the CEO faces a maximum penalty of 25 years in prison on the securities fraud scheme charge and 20 years in prison on each of the insider trading charges.
These are the first-ever criminal allegations that relate exclusively to the use of a Rule 10b5-1 plan – and only the second SEC enforcement action. Hold on to your hats, though, because there are likely more to come. As I blogged a few months ago, the SEC’s Enforcement Division has been on the lookout for problematic Rule 10b5-1 plans, after notching its first settlement last September. Like the SEC, the DOJ also says that it has a “data-driven initiative” to identify executive abuses of 10b5-1 trading plans.
While this case – on its face – seems to afford some pretty useful facts for the regulators, it also serves as a giant red flag for any insiders who want to throw caution to the wind and quickly sell shares outside of the as-amended Rule 10b5-1 plan requirements. In this article, the defendant’s lawyer complains that the SEC & DOJ filed their cases without notice, following some “good faith” discussions. So, this initiative appears to be a “full steam ahead” endeavor – which is not a promising environment for anyone whose trades fall in a grey area.
Because trading under a plan that complies with the new requirements of Rule 10b5-1 is not an exclusive affirmative defense, the SEC’s newly effective rules on this topic also require quarterly disclosures of “non-Rule 10b5-1 trading plans” adopted by insiders. This Nelson Mullins blog from Gary Brown & Charles Vaughn asks, “what does that even mean?”
The blog offers a side-by-side comparison of a “real” Rule 10b5-1 plan & a “non-Rule 10b5-1 trading plan” – and closely analyzes whether any distinction actually exists. Here’s the conclusion:
The side-by-side comparison and analysis of a “non-Rule 10b5-1 trading arrangement” and a “Rule 10b5-1 plan” reveals that the only real differences are the cooling off periods and the certification requirements for issuer officers and directors under a “Rule 10b5-1 plan.” No one would realistically dispute that they may not enter into a trading arrangement with a lack of good faith or with the intent to circumvent the securities laws. The prohibition on multiple or overlapping plans is somewhat of a “throwaway”; courts had already ruled that those arrangements were indicators of a lack of good faith in entering into such plans, which resulted in those plans failing to provide an affirmative defense.
Does that mean that a “non-Rule 10b5-1 trading arrangement” is simply one that either:
– does not contain the required “cooling off” period; or
– if adopted by a director or officer, did not contain the required certification?
Take the examples of the limit orders referenced above – if you added a cooling off period and a certification to either order, would that convert it into a “real” Rule 10b5-1 plan? If that indeed is the case, the only difference is that one provides an affirmative defense while the other simply negates proof of “scienter” – an element of a Rule 10b-5 case.
Gary & Charles say that the confusing definition & its related disclosure requirement is going to result in a lot of extra work. Here’s why:
Absent additional SEC guidance, companies must approach these new requirements with extreme care and, in our judgment, err on the side of providing more disclosure than may be necessary regarding “non-Rule 10b5-1 trading arrangements.” That path will require quarterly inquiries to corporate officers and directors about those arrangements. Section 16 reports generally report only trades; therefore, a review of those filings might not reflect the adoption, modification or termination of either “non-Rule 10b5-1 trading arrangements” or “real” Rule 10b5-1 plans.
For companies to meet their new quarterly disclosure obligations, their insider trading policies – which must be filed with the SEC as exhibits – must now require pre-clearance and approval of not only “real” Rule 10b5-1 plans but the host of transactions that might constitute “non-Rule 10b5-1 trading arrangements.”
The blog concludes with language that could’ve made the rule more clear. Unfortunately, that’s not the world we’re living in.
Just a couple of days ago, I blogged that “early returns” from the universal proxy card regime show that the sky isn’t falling (yet). While that may be true for the moment, this HLS blog from Keir Gumbs – Broadridge CLO, SEC/Covington/Uber alum, & long-time friend to many in this community – suggests we also aren’t out of the woods. Keir highlights new Corp Fin guidance on Voting Instruction Forms, which arose as part of the aborted Trian/Disney proxy contest, and could “open the floodgates” to successful activist campaigns. Here’s an excerpt:
Specifically, the staff of the SEC’s Division of Corporation Finance has taken the position that:
– a voting instruction form should mirror the proxy card to the furthest extent possible, including with respect to the instructions relating to signed, but unmarked cards, partially marked proxy cards and overmarked proxy cards, and
– a soliciting party can include the instructions of their choosing so long as the disclosure in the proxy statement, proxy card and voting instruction form are clear to investors.
The SEC took this position in response to a new approach to proxies and VIFs advocated for by the Trian Group. Specifically:
– Unmarked but Signed Proxies and Voting Instructions – Trian Group took the position that unmarked proxy cards and VIFs should be instructed as “FOR” their nominee to the Board and “WITHHOLD” on all of the nominees recommended by The Walt Disney Company.
– Overmarked Voting Instructions – Trian Group took the position that overmarked proxy cards and VIFs (where a shareholder votes “FOR” more directors than available seats) should be marked “FOR” their nominee to the Board, “FOR” the 10 unopposed management nominees and “WITHHOLD” on the one opposed management nominee.
– Partially Marked Voting Instructions – Voting instructions were to be executed exactly as cast i.e., whichever Director nominees get a “FOR” vote will be marked as a “FOR” and the remaining nominees will be marked as “WITHHOLD”
The key to this new approach is disclosure. From the SEC’s perspective, these and similar changes are acceptable under the proxy rules as long as the soliciting party is clear regarding these outcomes.
Keir goes on to explain that this guidance is “meaningfully different” from how this issue has been addressed in the past – where unmarked proxy cards & VIFs would be completed in accordance with management’s recommendation, partially marked proxy cards & VIFs would be submitted only with respect to those items, and overmarked proxy cards & VIFs were returned to banks or brokers for further instructions. Here’s more detail:
The big change resulting from the new SEC guidance most directly impacts how Broadridge processes overmarked VIFs (e.g., voting for 12 nominees when there are only 11 seats that are up for re-election). Historically Broadridge has pulled out overmarked VIFs and sent them to the relevant bank or broker for further instruction from the relevant investor. Now, instead of sending such forms for further instructions, the SEC guidance requires that firms rewrite overmarked VIFs to follow the instructions from the soliciting party regarding such votes. This means, as was the case in the Trian/Disney contest, that an overmarked card could be voted in favor of the soliciting party’s candidates to the Board with withhold votes for the other side’s candidates.
Here’s the good news, per Keir:
One might wonder what this portends for proxy contests based on past practice. There, the news is good. As a starting matter, investors voting online can’t overvote, and we [at Broadridge] are updating our systems to ensure that they can’t undervote either. This means that the proposed changes should not impact voting by institutional investors, which typically represent 70% or more of shares entitled to vote and who largely vote online using the voting tools provided by ISS, Glass Lewis and Broadridge. This also helps for online voting by retail investors, which typically represent 20-25% of shares entitled to vote a proxy. Excluding online voting, we are left principally with the 5-6% of shares that are voted using paper VIFs.
The pool gets even smaller – of the 5-6% of shares that are voted through paper VIFs, a very small percentage – typically less than 0.05% of shares – include overmarks. Those are the VIFs that are most impacted by the new SEC guidance.
Keir agrees that it’s too early for grand predictions about the impact of universal proxy. But he makes clear that we are witnessing a lot of big changes to proxy voting right now. Keir shares that Broadridge is making several changes to accommodate the changing mechanics of proxy contests – including the increasing ability of retail investors to easily vote. Those include Broadridge’s online voting app (ProxyVote), working on pass-through voting solutions, and providing end-to-end vote confirmation. That’s a lot of action!
We’ve just posted the registration links for our “2023 Proxy Disclosure & 20th Annual Executive Compensation Conferences” – which will be held virtually September 20th – 22nd. That’s right, this event has been serving up practical guidance, direct from the experts, for two decades!! For this milestone year, there will be plenty to talk about – and we hope you can join us.
We’re particularly excited about the fact that Corp Fin Director Erik Gerding will be sitting down with our very own Dave Lynn for an interview about his latest views on Corp Fin priorities & expectations.
This interview in itself is a compelling reason to be there. But if you (or your boss) need more convincing, consider these benefits (feel free to pass these along to whomever approves your budgeting requests):
– The Conferences are timed & organized to give you the very latest action items that you’ll need to prepare for the flurry of year-end and proxy season activity. Why spend time & money tracking down piecemeal updates to share with your higher-ups & board – all while you’re under a deadline and have other pressing obligations, increasing the risk of mistakes – when you can get all of the key pointers at once?
– Unlike some conferences, the on-demand archives (and transcripts!) will be available at no additional charge to attendees after the event, and you can continue to access them all the way till July 2024. That means you can continue to refer back to the sessions as issues arise. Again, saving time & money.
– Due to new SEC rules, the shareholder proposal environment, the increasing emphasis on risk oversight and pressures that companies are facing from both ends of the political spectrum, the performance of boards, individual directors and – thanks to Delaware’s latest spin on Caremark, individual officers – will be subject to greater & greater scrutiny in the coming proxy seasons. That could affect director elections, as well as your company’s ability to raise capital, and your directors’ and officers’ exposure to derivative claims. Our expert panelists will be sharing practical action items to protect your board & officers – and risks to watch out for. Facing a low vote for any director is a nightmare scenario, even if you’re not the target of a proxy contest. This event will empower you to avoid that situation.
– There’s an “early bird” rate!! We understand budgets are very tight and that more cuts could be coming. If you sign up now, you get the best price. This helps us plan ahead, and helps you save money. Register online by credit card – or by emailing sales@ccrcorp.com. Or, call 1.800.737.1271.
You can get a “sneak peek” right now at the topics & speakers who will be joining us. As you can see, it’s an illustrious group. We’ll be sharing more about the session agendas in the weeks & months to come!
