Between the FTC’s efforts to persuade judges that antitrust laws mean whatever it says they mean and the anti-ESG crowd’s position that group initiatives targeting climate issues involve “climate cartels,” it seems hard to imagine that anyone could stretch traditional antitrust principles any further. Well, Michael Levin at The Activist Investor recently flagged a new article from Prof. Danielle Chaim of Israel’s Bar-Ilan University that says “hold my beer.” Here’s an excerpt from the abstract:
This Article offers a novel — antitrust — perspective on a growing phenomenon in capital markets: institutional investor coalitions. It reveals the anticompetitive risks that investor coalitions pose and challenges the prevailing positive view of this development in capital markets. Traditionally, corporate law has encouraged investor cooperation, regarding it as the solution to the well-known collective-action problem facing public shareholders.
As this Article shows, however, the recent evolution of investor alliances into powerful, orchestrated coalitions often emerge at the border between firms and markets, affecting not only the intra-firm governance arrangements of the companies held by the coalition members but also the capital markets themselves. At the firm–market border, cooperation among institutional investors — even around seemingly benign corporate governance issues — provides an opportunity for tacit collusion that grants members an unfair advantage in the markets in which they compete.
As an example of this anti-competitive conduct, Prof. Chaim cites institutional investor efforts to end the use of dual class structures in IPOs. She contends that because of their buy-side power, this effort “creates a cartel of buyers in the primary market, resulting in two potential economic distortions: (1) abnormal underpricing of dual-class offerings and (2) suboptimal governance arrangements.”
Since I’m on record as saying this whole anti-dual class crusade is one of the most disingenuous “good governance” campaigns ever waged, I get a kick out of this argument. What I love most about it is that it basically says that while institutional investors & their advocates whine about the need for government intervention because “collective action” problems among investors are insurmountable, they’re actually engaging in collective action that’s so formidable it violates the antitrust laws.
Sadly, I think the argument is a stretch & I won’t hold my breath waiting for a court to sign off on it. But a guy can dream, can’t he?
Each year, the NYSE sends out its annual guidance letter to listed companies. Working your way through the letter to see what’s changed over the prior year’s version can be a little tedious, but you won’t have to do it this year. That’s because Weil’s Howard Dicker sent us this redlined version of this year’s letter that shows the changes over last year’s version. Thanks, Howard!
In a recent speech, Assistant AG Kenneth Polite announced important changes to the DOJ’s Corporate Enforcement Policy (CEP). The changes are designed to provide increased incentives for corporate self-reporting & cooperation with the DOJ by companies that have identified that have identified wrongdoing. The updated policy provides a path that may enable even companies with “aggravating circumstances” to avoid prosecution through a combination of “robust compliance” efforts to prevent misconduct and “even more robust cooperation and remediation on the back-end, if a crime occurs.”
In the past, the CEP applied only to FCPA prosecutions, but it now applies to all DOJ criminal proceedings. In order to appreciate the potential significance of the CEP policy changes, you need to know that “aggravating circumstances” is DOJ-speak for things like involvement by senior executives in the misconduct, significant profits to the company resulting from it, the pervasiveness of misconduct within the company and the company’s prior history of criminal misconduct.
In other words, the DOJ is telling companies that would’ve been hammered under the old policy that they’ve a chance for meaningful leniency if they go all-in when it comes to cooperating with the government. This WilmerHale memo discusses the changes and notes that under the revised CEP:
– Companies that voluntarily self-disclose misconduct will be eligible for declinations, even where aggravating circumstances that may ordinarily warrant a criminal prosecution are present, provided specific conditions are met.
– Companies that do not voluntarily self-disclose, but engage in extraordinary cooperation and remediation, will be eligible for a fine reduction of up to 50% from the low end of the U.S. Sentencing Guidelines (“Guidelines”) range. However, there will be no presumption of entitlement to such a reduction, and the most substantial reductions will be reserved for only the “most extraordinary levels” of cooperation and remediation. Recidivists will be eligible for a similar reduction, but generally not from the low end of the Guidelines range.
– For companies that voluntarily self-disclose misconduct, fully cooperate with an investigation, and timely and appropriately remediate, but do not receive a declination under the Corporate Enforcement Policy, DOJ will recommend a reduction in the company’s fine of 50% to 75% from the low end of the Guidelines range, provided the company is not a criminal recidivist. Recidivists will be eligible for a similar reduction, but generally not from the low end of the range.
The WilmerHale memo also provides some key takeaways for companies & directors concerning the change in the DOJ’s policy. One of these is that because the favorable consequences of being awarded extraordinary cooperation & remediation credit are so significant, corporate leaders will be incentivized to “take the most cooperative posture possible with DOJ amidst any investigation and to implement and test remediation steps early in the investigation.” I’m not a criminal lawyer, but I think that means that the always popular practice of throwing corporate officers under the bus when potential wrongdoing is discovered has a good chance to become a recognized Olympic sport.
In our recent webcast on 2023 proxy disclosures, Mark Borges observed anecdotally that more companies appear to be permitting directors and officers to pledge shares. Mark said that these companies should disclose the safeguards they’ve put in place to prevent the pledge from backfiring and ending up with insider trading allegations. Those companies and their directors and officers should also check out this Orrick memo, which reviews some things insiders should consider before pledging shares. This excerpt addresses the risks associated with pledge arrangements:
Various risks may arise for both the insider and the company in connection with pledging shares since share pledging may be utilized as part of hedging or monetization strategies that limit an insider’s economic exposure related to their ownership of the company’s shares, even while the insider maintains voting rights.
The personal risk to the insider in connection with pledging shares is that, if the value of the shares falls below certain contractual minimums set in the agreement by which the shares are pledged, the insider may be subject to a margin call, in which case, the insider may be required to either sell the pledged shares, pledge additional shares, pay cash to make up for the shortfall or reduce the amount of the loan. If the insider sells shares that they are contractually or statutorily prohibited from selling as a result of the margin call, they may expose themselves to liability.
A margin call can have several negative consequences on a company and the affected insiders. The first is that if the insider is forced to sell the shares, the sale could cause the share price of the company to fall. The second is that the act of pledging shares and the risk of a margin call may create a misalignment of interests between the insider and the company’s shareholders, as the insider may be incentivized to take actions that limit his or her exposure to a margin call. Either scenario could potentially subject the company and its insiders to shareholder lawsuits, particularly in an environment of declining share prices.
The “worst case scenario” in the event of a margin call involving a large amount of an insider’s shares can be very bad – and if you remember the Green Mountain Coffee Roasters fiasco from about a decade ago, you know exactly what I mean by “very bad.”
We’ve posted the transcript from our recent webcast – “ISS Forecast for 2023 Proxy Season.” ISS’s Marc Goldstein provided a recap of what transpired during the 2022 proxy season and thoughts on the issues companies will face in the upcoming proxy season. Davis Polk’s Ning Chiu & Gunster’s Bob Lamm joined in the dialogue with Marc. The program was full of useful information, including this nugget about what ISS expects from companies with less than 70% say-on-pay support:
What we always tell companies is, “Go and talk to your shareholders.” We want to see in the proxy how many shareholders you spoke to. It can be a number, it can be a percentage. We want some indication of the breadth of the engagement program. What did you hear from shareholders and what did you do in response? It’s not rocket science, it’s fairly simple. If companies report in the proxy that shareholder feedback was on issues A, B, and C and ISS had identified a different set of issues in our report, we expect the company to be responsive to what shareholders said rather than what was in the ISS report.
If a company received low support and then claims that every shareholder they spoke to was supportive of the program, that raises some credibility issues. Clearly, you’re not talking to the right people if Say on Pay failed or got 50% support. Someone obviously wasn’t supportive. Go out and find them, talk to them, and figure out what was the basis of their opposition and what you can do about that.
If you aren’t already a member with access to this transcript and the on-demand audio replay, sign up today for a no-risk trial! You can do that online or by emailing sales@ccrcorp.com. 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.
When I read Liz’s “Debbie Downer” blog last week about the disclosure implications of the “polycrisis,” I was so bummed out that I wanted to go back to bed and pull the covers up over my head. However, my wife decided there was zero chance I was going to get away with that stunt and accused me of using that as an excuse to avoid taking the trash & recycling out to the curb.
Okay, it turns out she was right about that, but the important thing is that I’ve recovered my equilibrium and feel that I need a “Gloomy Gus” blog to pair with Liz’s Debbie Downer offering. Thanks to this Morgan Lewis memo, I’ve found my topic. Liz catalogued a whole bunch of economic & geopolitical developments that might merit an updated risk factor or two, but this excerpt from the memo highlights one she didn’t address – the increasingly frosty relationship between the United States and China:
As geopolitical tensions between the United States and China continue, issuers should consider carefully tailoring their risk factors to address specific risks facing their businesses related to China, and should benchmark these risk factors against what their peers are disclosing. While the risk factors of Chinese-based companies publicly traded in the United States offer a catalog of China-related risks to consider, including those risks for which the US Securities and Exchange Commission (SEC) has requested explicit disclosure through staff comment letters, many of these will not be relevant to US issuers doing business in China.
Reliance on generic risk factors related to the risks of doing business internationally may fall short of properly informing investors of the specific risks an issuer may face when engaging in certain China-related activities, and the SEC discourages such boilerplate disclosure.
The memo says that while the SEC hasn’t put forward guidance on risk factor disclosure relating to the implications of significant exposure to China, companies should look to the disclosure guidance provided by the Staff on COVID-19 & the Staff’s sample comment letter on the business impact of Russia’s invasion of Ukraine as a framework. It goes on to provide a list of some specific areas of China-related risk that companies might want to address in their disclosures.
Thompson Hine recently released its second annual survey of corporate ESG programs. The survey addresses a variety of issues associated with those programs. Here are some of the highlights:
– The top current challenge for respondent private companies is Data Collection (20%) (but not Data Verification (only 2%)), followed by Green Initiatives and Staffing (12% each), and Talent Management/Human Capital and Regulatory Activity (10% each). Risk Management is also a concern (8%).
– Public companies report currently being most concerned with Green Initiatives (23%), followed by Data Verification (15%), Regulatory Activity (13%) and Talent Management/Human Capital (8%).
– Private company respondents reveal that their CEO usually has primary responsibility for ESG oversight (35%, compared to 31% last year). However, while 25% of public companies surveyed last year said their CEO had primary ESG responsibility, this year that number dropped to only 8%, with the Chief Sustainability Officer assuming that role 28% of the time.
– While the majority of respondent companies are not yet seeking ESG information or obligations through their contractual arrangements, 24% of private companies and 31% of public companies report they are doing so.
– 53% of respondent companies’ customers are not currently requiring them to report ESG information, but 34% of customers are asking for information on GHG emissions, 25% want DEI data and 21% are concerned about human capital.
Of course, the elephant in the room this year when it comes to corporate ESG programs is the looming adoption of the SEC’s proposed climate disclosure rules. That’s not lost on survey respondents – not only are 79% of public companies preparing to follow the mandates of the draft SEC rule, but so are 30% of private companies.
Tune in at 2pm Eastern tomorrow for the webcast – “The SEC’s Rule 10b5-1 Amendments: What Issuers & Insiders Need to Know” – to hear Brian Breheny of Skadden, Ning Chiu of Davis Polk, Meredith Cross of WilmerHale, Dave Lynn of Morrison Foerster and TheCorporateCounsel.net, and Ron Mueller of Gibson Dunn discuss the changes to Rule 10b5-1 & the adoption of disclosure obligations and provide insights about what companies and insiders should do to prepare for the new regime.
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. All credits are pending state approval.
Members of TheCorporateCounsel.net 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.
I blogged last fall about a reason to be cautious when amending advance notice bylaws in response to the SEC’s newly effective universal proxy card rules: hedge fund activists aren’t going to take these amendments lying down. Now, as we continue to await the views of proxy advisors and institutions on this topic, well-known shareholder proponent Jim McRitchie is proactively encouraging “guardrails.” Jim recently announced that he has filed shareholder proposals with 29 companies on the topic of “fair elections.”
The proposals request that the companies adopt a bylaw amendment that would require shareholder approval for advance notice bylaws that go beyond the “norms” that existed before the SEC’s new universal proxy card rules went into effect. Specifically, for advance notice bylaw amendments that:
1. Require the nomination of candidates more than 90 days before the annual meeting,
2. Impose new disclosure requirements for director nominees, including disclosures related to past and future plans, or
3. Require nominating shareholders to disclose limited partners or business associates, except to the extent such investors own more than 5% of the Company’s shares.
When it comes to the case that I mentioned at the outset of this blog, the Delaware Chancery Court ruled against the company in late December. If you’re going down the “amendment” path, John recently shared a few tips on DealLawyers.com. This Proxy Season Blog from last week gives even more guidance on meeting conduct in the event of a contested election.
This blog from Gunster’s Bob Lamm zeroes in on a trend plaguing many companies these days: too many chiefs. As Bob points out, when too many people are responsible, nobody is accountable. Here’s an excerpt that explains why an expanding C-suite needs to be handled with care:
From a broader governance perspective, one would like to think that before a company creates some of the more unusual and/or duplicative chiefdoms above, the board or the comparable authority would have a clear understanding of where each chief’s responsibilities begin and end, and how the responsibilities of each relate to other chiefs’ areas. However, my experience suggests that may not be the case, which means that accountability is difficult to determine both internally and externally. Perhaps this isn’t a problem when things are going well, but when they’re not?
There are many other areas of concern to a nerd like me. For example, which chiefs are deemed to be “executive officers” under SEC rules? Are they also deemed Section 16 officers? What’s the rationale for each? (As an aside, it’s hard enough to explain to clients why someone who is an “executive officer” may not be a “Section 16 officer,” or vice versa. This plethora of chiefdoms doesn’t help.) There seem to me to be compensation issues as well – are all chiefs created equal? The answer must be “no,” because the traditional chiefs – the CEO, CFO, etc. – do not have identical compensation. But how do you weigh compensation levels when presumably each chief oversees a significant area?
