Yesterday, the SEC announced that it is reopening the comment period (again) for its share repurchase disclosure rulemaking, which was proposed back in December 2021 at the same time that the Rule 10b5-1 changes were proposed. Under proposed amendments, the SEC would: (i) require daily repurchase disclosure on a new Form SR, which would be furnished to the SEC one business day after execution of a company’s share repurchase order; (ii) amend Item 703 of Regulation S-K to require additional detail regarding the structure of a company’s repurchase program and its share repurchases; and (iii) require information disclosed pursuant to Item 703 of Regulation S-K and pursuant to Form SR to be reported using Inline XBRL. The SEC’s announcement of the reopening notes:
The Commission is reopening the comment period because, after the proposed amendments were published for public comment, The Inflation Reduction Act of 2022 was enacted. The law imposes upon certain corporations a non-deductible excise tax equal to one percent of the fair market value of any stock of the corporation repurchased by such corporation during the taxable year. As a result, the Commission staff has prepared a memorandum that discusses potential economic effects of the new excise tax that may be helpful in evaluating the proposed amendments.
The DERA memorandum referenced in the reopening release is posted on the SEC’s website. The public comment period will remain open for 30 days after publication of the reopening release in the Federal Register. The reopening was met with criticism from Commissioner Uyeda, who issued a statement noting that the 30-day comment period “commences shortly before, and will overlap with, major holidays later this month” and recommending that a 45-day comment period would be preferable to receive more thoughtful responses.
If you are trying to keep track of where things stand with the avalanche of SEC rulemaking, be sure to check out our “cheat sheet” resource, which tracks selected rulemaking and shows you where on our site you can find practical guidance on each topic. You can find the cheat sheet via the blue nav bar at the top of the home page. If you do not have access to all of the great resources available here on TheCorporateCounsel.net, sign up today, email Sales@CCRcorp.com or call 1-800-737-1271.
Yesterday, the Staff published three new Proxy Rules and Schedule 14A Compliance and Disclosure Interpretations addressing the new universal proxy rules. Two of the new CDIs deal with the company’s obligations when a dissident shareholder’s nominees are rejected based on advance notice bylaw requirements, and one of the CDIs makes the point that a dissident must provide its own proxy card as part of its meaningful solicitation efforts and not just rely on the company’s proxy card. The new CDIs are as follows:
Question 139.04
Question: A registrant receives director nominations from a dissident shareholder purporting to nominate candidates for election to the registrant’s board of directors at an upcoming annual meeting. The registrant, however, determines that the nominations are invalid due to the dissident shareholder’s failure to comply with its advance notice bylaw requirements. Must the registrant include the names of the dissident shareholder’s nominees on its proxy card pursuant to Rule 14a-19(e)(1) under these circumstances?
Answer: No. Only duly nominated candidates are required to be included on a universal proxy card. See Release No. 34-93596 (Nov. 17, 2021) (noting that universal proxy cards “must include the names of all duly nominated director candidates presented for election by any party…”, and explaining that “[a] duly nominated director candidate is a candidate whose nomination satisfies the requirements of any applicable state or foreign law provision and a registrant’s governing documents as they relate to director nominations”). If the registrant determines, in accordance with state or foreign law, that the dissident shareholder’s nominations do not comply with its advance notice bylaw requirements, then it can omit the dissident shareholder’s nominees from its proxy card. [December 6, 2022]
Question 139.05
Question: A registrant determines that a dissident shareholder’s director nominations do not comply with its advance notice bylaw requirements and excludes the dissident shareholder’s nominees from its proxy card. The dissident shareholder then initiates litigation challenging the registrant’s determination regarding the validity of the director nominations. Under these factual circumstances, what are the registrant’s obligations with respect to its proxy statement disclosures and solicitation efforts?
Answer: The registrant must disclose in its proxy statement its determination that the dissident shareholder’s director nominations are invalid, a brief description of the basis for that determination, the fact that the dissident shareholder initiated litigation challenging the determination, and the potential implications (including any risks to the registrant or its shareholders) if the dissident shareholder’s nominations are ultimately deemed to be valid.
If a registrant furnishes proxy cards that do not include the dissident shareholder’s director candidates and a court subsequently determines that the dissident shareholder’s candidates are duly nominated, then the registrant is obligated under Rule 14a-19 to furnish universal proxy cards with the dissident shareholder’s candidates. Accordingly, it should discard any previously-furnished proxy cards that it received. The registrant also should ensure that shareholders are provided with sufficient time to receive and cast their votes on the universal proxy cards prior to the shareholder meeting, including, if necessary, through the postponement or adjournment of the meeting. [December 6, 2022]
Question 139.06
Question: Can a dissident shareholder conducting a non-exempt solicitation in support of its own director nominees simply file a proxy statement on EDGAR, avoid providing its own proxy card, and instead rely exclusively on the registrant’s proxy card to seek to have its director nominees elected?
Answer: No. Rule 14a-19(e) requires each soliciting party in a director election contest to use a universal proxy card that includes the names of all director candidates, including those nominated by other soliciting parties and proxy access nominees. Rule 14a-19(a)(3) further requires a dissident shareholder to solicit holders of at least 67% of the voting power of shares entitled to vote on the director election contest and to include a representation to that effect in its proxy statement. This requirement is intended to prevent a dissident shareholder from capitalizing on the inclusion of its nominees on the registrant’s universal proxy card without undertaking meaningful solicitation efforts. See Release No. 34-93596 (Nov. 17, 2021). A dissident shareholder would fail to comply with these rules if it does not furnish its own universal proxy cards to holders of at least 67% of the voting power through permitted methods of delivering proxy materials (such as the Rule 14a-16 “notice and access” method). [December 6, 2022]
As you are preparing your proxy materials this year, keep in mind that the SEC’s universal proxy rulemaking made changes to the disclosure requirements that apply outside of contested election situations. As we noted in our perennial “Annual Season Items” article in the latest issue of The Corporate Counsel:
Rule 14a-4(b) as amended now requires the inclusion of an “against” voting option in lieu of a “withhold authority to vote” option on the form of proxy for the election of directors if state law gives legal effect to such a vote and also permits shareholders to abstain in an election governed by a majority voting standard. In addition, Item 21(b) of Schedule 14A as amended expressly requires the disclosure of the effect of a “withhold” vote.
In the past, the Staff has expressed concern about the lack of clarity in disclosures concerning the votes required for the election of directors, so we can expect the Staff to be paying close attention to any changes to proxy disclosures that result from this latest round of rule amendments.
If you would like to check out more of our coverage of the important topics you need to know as we enter the upcoming annual proxy and reporting season, please email sales@ccrcorp.com to subscribe to The Corporate Counsel newsletter.
With so much attention on board diversity these days, an inevitable question is whether the increased diversity of corporate boards influences broader diversity gains in companies. It certainly stands to reason that a more diverse board of directors will take actions and influence policies that could promote the DEI efforts of the companies they serve.
A recent National Law Review article highlights an academic study titled “Do Diverse Directors Influence DEI Outcomes?” which examined the influence of more diverse boards on company DEI efforts. The study sought to examine “whether greater board diversity is associated with more diverse workforce hiring, more equitable pay practices, and more inclusive corporate cultures, as evidenced through employees’ perceptions of cultural norms.” The study reviewed a sample of S&P 1500 firms over the period from 2008 through 2020.
The article notes that some of the study’s findings include the following:
– Broad-based board diversity” (a measure that includes gender, ethnicity, age, education, expertise, and board experience) “is statistically associated with increased diversity at all depths.”
– Companies “with an increase in female representation on the board increase the female representation at the company.” The study conservatively estimated that an increase of two percentage points in female board representation is associated with an increase of 5.2% in female employment and an increase of 3.0% in female staff.
– Companies with an increase in female representation on the board also show an increase in non-white representation at the company. An increase of two percentage points in female board representation is associated with an increase of 5.0% in non-white employment, “primarily driven by hiring of non-white staff.”
– The study showed “a meaningful relationship” between non-white directors and non-white employees, but “no relation between non-white directors and female employees within the firm once control variables have been included.” “Thus, the evidence on allyship suggests women are stronger allies for non-white employees than non-white employees are for women.”
– The study found “some evidence . . . that having more non-white directors is associated with lower salary gaps for non-white employees,” but “mostly [saw] little evidence that board diversity alters salary gaps.”
– “Greater broad-based board diversity is significantly associated with a higher number of stars for Glassdoor’s five-star rating system for company culture” and with other metrics evaluating employees’ perceptions of their workplace and management.
– The study found disagreement among rating agencies as to ESG ratings and the S component of ESG. “This suggests that asset managers looking to incorporate gender and racial equity into their investment decision-making process need to look beyond check-the-box approaches to ESG ratings.”
This will no doubt be an area of continued academic study as boards become more diverse and more attention is focused on company DEI efforts.
As this Cooley blog notes, the fight continues over the two California laws mandating board diversity. Earlier this year, two Los Angeles Superior Courts struck down those laws as unconstitutional and enjoined their implementation and enforcement; however, those injunctions were temporarily lifted as the state appealed the decisions. Last week, the California appeals court that is considering this matter vacated the temporary stays, putting back in place the injunctions against implementation and enforcement of the two diversity statutes. We can certainly expect some further twists and turns as the appeals court considers the issues on appeal.
The latest issue of The Corporate Counsel has been sent to the printer. It is also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in our “new normal” of remote work. The issue includes articles on:
– Annual Season Items
– Managing Restatements of Financial Results
Please email sales@ccrcorp.com to subscribe to this essential resource if you are not already receiving the important updates we provide in The Corporate Counsel newsletter.
On Friday, Liz announced her plans to go back to private practice, while continuing to be a contributor to our resources going forward. Believe it or not, I can completely understand her decision to go back to private practice.
When I left the SEC back in 2007 and joined what was then Executive Press on a full-time basis, I realized after about eighteen months that I actually missed the practice of law (as opposed to just writing about the practice of law), so I felt the need to get back to helping clients with their legal issues. I am glad that I did, because it gave me a chance to build an amazing practice, while at the same time my practical experience helped me improve the content that I could provide to you through our resources. My hope is that Liz will have a similar experience, while at the same time improving that all-too-elusive work-life balance.
I would like to take this opportunity to thank Liz for all of the extraordinary efforts that she has undertaken over the past 6 years. Liz is a great colleague to work with, and she has inspired me to continue to generate content across our resources. Liz has ably steered us through a lot of change over the past few years and has worked very hard to bring you some incredible resources, such as PracticalESG.com and all of the up-to-date treatises, handbooks and Practice Areas across our sites. I also want to thank Liz for supporting my efforts, listening to my crazy ideas and providing me with the motivation to bring you the practical guidance that you need. Thank you Liz, best wishes on your new endeavors and I look forward to continuing to collaborate with you in the future.
As Liz noted on the Proxy Season Blog, last week ISS announced updates to its benchmark voting polices that will be effective for the 2023 proxy season. Here are the highlights:
– Climate Disclosure & Targets – Globally, there’s a new “climate board accountability” policy for companies in the Climate Action 100+ Focus Group. If the company isn’t adequately disclosing climate risk and doesn’t have either medium-term GHG emission reduction targets or Net Zero-by-2050 for at least Scope 1 & Scope 2, ISS will generally recommend voting against the appropriate directors and/or other voting items available. There will also be additional info in research reports on this, for all Climate Action 100+ companies.
– Board Gender Diversity – Now in effect for all Russell 3000 and S&P 1500 companies, generally vote against or withhold from the nominating committee chair where there are no women on the board (exception if there was a woman at the preceding annual meeting and there’s a “firm commitment” to return to gender-diverse status within one year)
– Officer Exculpation – In light of DGCL changes, ISS is adopting a policy to recommend case-by-case on proposals providing for exculpation provisions in a company’s charter.
– Unequal Voting Rights – The previous grandfathering of older companies with unequal voting rights will be removed in 2023. As part of this update, a de minimis exception has been defined as no more than 5 percent of total voting power.
– Problematic Governance Structures – For the U.S. policy on companies that go public with other problematic governance structures (including classified boards and supermajority vote requirements), a “reasonable sunset period” to fully eliminate the provision is being defined as no more than 7 years from the date of going public.
– Political Expenditures Alignment Transparency Shareholder Proposals – A new specific policy is being introduced for shareholder proposals requesting company transparency on the congruency of its political contributions and lobbying with its public commitments and policies, including climate lobbying congruency to its climate goals. The new policy will provide more transparency to the market about how such shareholder proposals are assessed and codify the case-by-case approach used in the 2022 proxy season. (Emily blogged about these proposals emerging last year, and it sounds like they are going to continue to proliferate.)
– Share Issue Mandates – For U.S. domestic issuers incorporated outside the U.S. and listed solely on a U.S. exchange, a policy is being introduced to generally vote for resolutions to authorize the issuance of common shares up to 20 percent of currently issued common share capital, where not tied to a specific transaction or financing proposal.
Mark your calendars now for our upcoming webcast scheduled for Tuesday, January 10th at 2pm Eastern, “ISS Forecast for 2023 Proxy Season.” We’ll have ISS’s Head of US Research, Marc Goldstein, to offer tips on how to prepare for 2023 issues. Marc will be joined by Davis Polk’s Ning Chiu and Gunster’s Bob Lamm.
