If your company or clients are among the ever-growing group of businesses that are looking to exit Russia following that nation’s invasion of Ukraine, you may want to take a look at this two-part guide to the decision-making process from The Conference Board. The first part reviews the actions that companies have taken to sever ties with Russia, provides advice on developing a clear and consistent decision-making framework, and offers guidance on how companies can prepare for situations involving violations of international law and human rights.
The second part focuses on disclosure & communications and discusses compliance with SEC disclosure requirements and corporate communications policies to describe the actions they have taken. Here’s an excerpt about some of the things to consider when corporate disclosures that go beyond regulatory requirements:
Many companies that have or had operations in Russia have engaged in communications other than those required by the SEC, such as statements by management and social media postings designed to communicate the companies’ commitment to corporate purpose, corporate citizenship, and other values underpinning their decision to suspend or continue operations in Russia. These statements can also serve other purposes, such as demonstrating that the decision to leave or not leave Russia is consistent with short- or long-term strategy.
However, these communications do not stand alone; they need to be considered in the context of SEC requirements and prohibitions and must also be consistent with the company’s communications policy. Among other things, companies should align their informal communications with the information in their SEC filings, as inconsistencies may raise comments from the SEC or subject the company to liability.
The content of informal communications, as well as their preparation, review, and dissemination, needs to be handled in accordance with the company’s communications policy. These internal policies, many of which reflect the requirements of SEC Regulation FD, often require reviews by specified individuals or groups, indicate who is authorized to speak for the company, and direct members of management and the board—and in some cases all employees—that any questions from the media or otherwise must be referred to a designated spokesperson.
Adhering to these policies will help make these communications “consistent, appropriate in tone, and reasonable in terms of time horizon and other factors.” He also points out that companies need to monitor developments so that their communications remain relevant and reflect reality. Above all, he says that companies must keep their boards informed so that they can provide appropriate oversight to the communications process & suggests that boards review these communications before they are issued.
Be sure to check out our “Ukraine Crisis” Practice Area for resources dealing with disclosure, sanctions compliance and other issues associated with the crisis.
– John Jenkins
Russia’s invasion of Ukraine has presented companies with an unprecedented decision – should they cut all ties with the world’s 11th largest economy? Companies pondering next steps when it comes to their Russian business operations should keep in mind that the eyes of the media – and their investors – are on them. In that regard, Yale School of Management Prof. Jeffery Sonnenfeld is maintaining a list of over 400 companies with Russian operations and their current status.
The list is graded – in order to earn an “A”, companies must have made a “clean break” with Russia. Companies temporarily curtailing their Russian operations while keeping return options open earn a “B” grade, while those scaling back some business operations while continuing others rate a “C”. Companies that are buying time by postponing new investments but maintaining current operations get a “D”, while those are digging in & defying calls for severing ties rate an “F”.
What’s the impact of this list? Well, it’s been credited in the media with helping accelerate the exodus of U.S. businesses from Russia, but it also looks like it’s having a bottom-line impact on those that have decided to stay. According to a recent Fortune article by Prof. Sonnenfeld, those companies identified as “digging in” have taken a sizeable hit to their stock prices:
Finally, our list provided a much cited “hall of shame” that guided the voices of employees, customers, and investors seeking to show their disapproval. In fact, the first day our list appeared on CNBC, many of the companies we identified as remaining in Russia saw their stocks drop 15% to 30%, on a day where the key market indexes fell only two to three percent.
This WSJ article discusses another issue that companies that continue operations in Russia, especially those that do so for “humanitarian” reasons, have to address – what do you do with the profits you’ve earned there?
– John Jenkins
Cutting business ties with Russia will cause financial losses – and in some cases, the amount involved can be staggering. Companies will likely look for ways to recoup some of these losses, and this Reuters article notes that one source may be political risk insurance. While standard insurance policies don’t cover extraordinary events like the fallout from Russia’s invasion of Ukraine, the article notes that $1 billion of political risk insurance was issued in 2020 alone for companies with Russian operations.
Unfortunately, having a political risk policy doesn’t mean that companies withdrawing from Russia will necessarily have a claim under it. This excerpt explains:
Companies that leave and abandon their business without any action taken by the Russia government to seize control of their assets will have a tough time collecting insurance, according to legal experts. “You see companies saying ‘we’re leaving because we support Ukraine.’ The question is then whether the policy covers a voluntary departure,” said Micah Skidmore of the law firm Haynes and Boone. Insurers are most likely to pay claims for revenues earned in Russian roubles that are no longer convertible to foreign currency, said legal experts.
The article says that additional actions by Russia that could support claims under political risk policies include asset seizures and nationalization of industries – all of which appear to be on the table.
– John Jenkins
One thing about the SEC’s climate change rule proposal seems pretty certain – if the rules are adopted in their current form, they are going to face legal challenges. On what grounds might the validity of the SEC’s climate change rules be subject to attack? This excerpt from Davis Polk’s recent blog on the rule proposal provides some insights:
Challenges to the SEC’s statutory authority. Nothing in the federal securities laws expressly authorizes the SEC to require the disclosures contemplated by the proposal. Instead, these laws generally permit the SEC to require disclosure that is “necessary or appropriate in the public interest or for the protection of investors.”
One of the SEC’s central arguments in support of its authority is that many investors—including certain large institutional investors—have expressed a desire to receive climate-related disclosure. However, public interest alone may not be enough to meet the statutory threshold, if a hypothetical “reasonable investor” would not find the required disclosure necessary for investment or voting purposes. This may also make it more difficult for the SEC to demonstrate that it has met its obligation to show that the benefits of the new requirements outweigh their costs.
This challenge is likely to be bolstered by the “major questions” doctrine, which provides that agency rules of major significance be the subject of a clear delegation of Congressional authority (and was relied on by the Supreme Court to nix the Biden Administration’s COVID-19 vaccine and eviction moratorium policies).
First Amendment challenges. The proposal is also likely to be challenged as violating the First Amendment, by compelling speech. This topic has received close scrutiny by the Supreme Court in recent years in other cases involving corporate speech.
If you’re looking for more information on the “major questions” doctrine, check out this Arent Fox Schiff memo. As to the First Amendment issues, Liz blogged last year about a letter from West Virginia’s AG threatening to bring an action on that basis against any ESG-related rulemaking by the SEC and you can check that out for more details on the First Amendment argument. Meanwhile, this post on the Business Law Prof Blog lays out an argument supporting the validity of the proposed rules.
– John Jenkins
Last week, the SEC announced that Martha Legg Miller, the Director of its Office of the Advocate for Small Business Capital Formation (OASB), will leave the agency at the end of April. She’s served as the OASB’s Director since it was first established in 2018, and this excerpt from the SEC’s announcement provides some of the highlights of her tenure:
During her tenure, she oversaw the development of novel educational resources to empower entrepreneurs – such as the centralized Capital Raising Hub, Navigator decision tool, Capital Trends Maps, and Cutting through the Jargon glossary. Ms. Miller’s leadership of the Office also helped increase the visibility and accessibility of SEC rulemakings through video summaries, collaboration on policy work across the agency, and engagement in year-round outreach events to elevate the voices of underrepresented entrepreneurs and investors. OASB also launched the SEC’s Small Business Capital Formation Advisory Committee, piloted digital solutions to increase public participation with the SEC’s annual Small Business Forum, and crafted annual reports to Congress.
The OASB’s current Deputy Director, Sebastian Gomez Abero, will serve as Acting Director after Martha Legg Miller’s departure.
– John Jenkins
Join us tomorrow at 2 pm eastern for the webcast – “Conduct of the Annual Meeting” – to hear General Mills’ Ben Backberg, Broadridge’s Dorothy Flynn, Juniper Networks’ Mary Catherine Malley, Capital One’s Vernicka Shaw, and the one & only Carl Hagberg, Independent Inspector of Elections and Editor of The Shareholder Service Optimizer, provide insights on investor expectations as well as practice pointers on meeting format & logistics, tricky vote tabulations, officer & director participation, and rules of conduct.
If you attend the live version of this 60-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 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, subscribe now by emailing sales@ccrcorp.com – or call us at 800.737.1271.
– John Jenkins
You can imagine that Larry Fink, the co-founder, Chair & CEO of the world’s largest asset manager, sat down 6 weeks ago to start outlining his letter to shareholders and vetting everything through the appropriate channels. There were plenty of important issues to cover – the net zero transition, human capital, inflation. Then Russia invaded Ukraine. Governments and private companies are cutting ties, the world order has been upended, we’re witnessing a massive humanitarian crisis, and BlackRock had to make some key recalculations & decisions in a very uncertain regulatory environment – including how to handle portfolios with Russian securities. BlackRock’s success & shareholder returns are very much tied to macroeconomic conditions.
The letter to shareholders that was posted yesterday (and filed in multiple formats on Edgar as additional soliciting material) is remarkably responsive to these recent developments, in line with the speed at which many companies took action. Larry Fink says that the way things are playing out reinforces BlackRock’s approach to using capitalism for good:
These actions taken by the private sector demonstrate the power of the capital markets: how the markets can provide capital to those who constructively work within the system and how quickly they can deny it to those who operate outside of it. Russia has been essentially cut off from global capital markets, demonstrating the commitment of major companies to operate consistent with core values. This “economic war” shows what we can achieve when companies, supported by their stakeholders, come together in the face of violence and aggression.
He goes on to say that supply chains and the inflationary impact will become even more important:
Russia’s aggression in Ukraine and its subsequent decoupling from the global economy is going to prompt companies and governments worldwide to re-evaluate their dependencies and re-analyze their manufacturing and assembly footprints – something that Covid had already spurred many to start doing.
And while dependence on Russian energy is in the spotlight, companies and governments will also be looking more broadly at their dependencies on other nations. This may lead companies to onshore or nearshore more of their operations, resulting in a faster pull back from some countries. Others – like Mexico, Brazil, the United States, or manufacturing hubs in Southeast Asia – could stand to benefit. This decoupling will inevitably create challenges for companies, including higher costs and margin pressures. While companies’ and consumers’ balance sheets are strong today, giving them more of a cushion to weather these difficulties, a large-scale reorientation of supply chains will inherently be inflationary.
I admit I was surprised to not find anything in this letter about cybersecurity or disinformation, or any specific references to China. But those topics aside, it does have something for almost everyone – which makes sense, given the wide-ranging fallout of this war and the many issues that BlackRock and its portfolio companies are dealing with. On crypto:
Finally, a less discussed aspect of the war is its potential impact on accelerating digital currencies. … As we see increasing interest from our clients, BlackRock is studying digital currencies, stablecoins and the underlying technologies to understand how they can help us serve our clients.
On the net-zero transition:
Longer-term, I believe that recent events will actually accelerate the shift toward greener sources of energy in many parts of the world. During the pandemic, we saw how a crisis can act as a catalyst for innovation. Businesses, governments, and scientists came together to develop and deploy vaccines at scale in record time.
To ensure the continuity of affordable energy prices during the transition, fossil fuels like natural gas will be important as a transition fuel. BlackRock’s investments – including one late last year – on behalf of our clients in natural gas pipelines in the Middle East are a great example of helping countries go from dark brown to lighter brown as these Gulf nations use less oil for power production and substitute it with a cleaner base fuel like natural gas.
On client-directed voting:
Much like asset allocation and portfolio construction, where some clients take an active role while others outsource these decisions to us, different clients are interested in different levels of involvement when it comes to casting proxy votes. After talking with our clients, we used new technology and other innovations to offer proxy voting choice. This is now available to institutional clients representing just over $2 trillion of index equity assets, including public pension funds serving over 60 million people. We see this as just a first step. Our ambition over time is to continue developing new technologies and working with industry partners to expand voting choice for even more clients.
On board oversight of strategy and recent downturns in performance, slotted in to the mid-section of the letter:
Our strategy, which we regularly review with our Board of Directors, remains rooted in our commitment to serving clients over the long term. We will: keep alpha at the heart of BlackRock; accelerate growth in iShares, private markets, and Aladdin; deliver whole portfolio advice and solutions to our clients and be the global leader in sustainable investing. Successful execution of this strategy will enable us to continue delivering industry-leading organic growth and generate value for our shareholders over the long term.
On BlackRock’s attention to internal human capital issues:
At the same time, we recognize the pandemic has redefined the relationship between employers and employees. To retain and attract best-in-class diverse talent, we need to maintain the flexibility of working from home at least part of the time. And our Aladdin technology has given us the flexibility to quickly pivot our operating model over these past two years, which will continue to be important given the uncertainty of the pandemic and the threat of new variants emerging.
We also remain focused on investing in our employees’ experience with BlackRock in other important ways: improving training and development, expanding mental health services and other benefits, and continuing to advance diversity, equity and inclusion (DEI) to make sure we’re broadening representation across the firm and cultivating an inclusive culture.
On Board composition:
We also give careful consideration to the composition of our Board to ensure it is positioned to be successful over the long term. We are committed to evolving our Board over time to reflect the breadth of our global business and look for directors with a diverse mix of experience and qualifications. We will continue to introduce fresh perspectives and make diversity in gender, race, ethnicity, nationality, age, career experience and expertise, as well as diversity of mind, a priority when considering director candidates.
In times of crisis, many companies take the very reasonable approach of saying that they’re monitoring events and will respond accordingly. What’s impressive about this particular letter, even though it’s still just words on a page, is that it “shows” rather than “tells.” The level of detail puts to rest any doubts that the board & management are thinking through the evolving situation from all angles, while not losing sight of the core business strategy and commitments. Larry Fink and team didn’t gain $10 trillion in assets under management without being master communicators.
– Liz Dunshee
After releasing a bunch of guidance earlier this year on its priorities & expectations, State Street Global Advisors has now also recently updated the following documents to reflect its positions:
1. North American Proxy Voting & Engagement Guidelines
2. Global Proxy Voting & Engagement Principles
3. Global Proxy Voting & Engagement Guidelines for E&S Issues
4. Frameworks for Voting E&S Shareholder Proposals
5. Issuer Engagement Protocol
This 6-page summary of material changes outlines the most significant changes, which include:
– Climate-Related Disclosure: SSGA may vote against the independent board leader at companies in the S&P 500, S&P/TSX Composite, FTSE 350, STOXX 600 and ASX 100 if companies fail to provide sufficient disclosure in accordance with the TCFD framework. SSGA views this as a “natural escalation” of previously stated expectations and expects to continue to expand this policy in coming years.
– Enhancing Racial & Ethnic Diversity: SSGA may vote against the Chair of the Nominating Committee at companies in the S&P 500 and FTSE 100 that do not have at least one director from an underrepresented racial and/or ethnic community on their boards; and may vote against the Chair of the Compensation Committee at companies in the S&P 500 that do not disclose their EEO-1 reports.
– Board Diversity: SSGA is maintaining its policy to possibly vote against the Chair of the Nominating Committee at companies in the S&P 500 and FTSE 100 that do not disclose, at minimum, the gender, racial and ethnic composition of their boards. In 2022, it will expect boards of listed companies in all markets & indices to have at least one woman director.
In 2023, it will expect companies in the Russell 3000, TSX, FTSE 350, STOXX 600, and ASX 300 indices to have boards composed of at least 30 percent women directors. It may waive the policy if a company engages with State Street Global Advisors and provides a specific, timebound plan for reaching the 30 percent representation of women directors.
SSGA may vote against the chair of the nominating and governance committee if a company fails to meet expectations. If that continues for 3 consecutive years, it may vote against all incumbent members of the nominating committee.
– R-Factor: Again this year, State Street Global Advisors may take voting action against the independent board leaders at companies in the S&P 500, FTSE 350, ASX 100, TOPIX 100, DAX 301 and CAC 40 indices that are R-FactorTM ‘laggards’ and ‘momentum underperformers’ unless it sees meaningful change. In 2024, it will be expanding the voting screen to include all R-FactorTM ‘laggards’ and ‘underperformers’ (i.e. not only ‘momentum underperformers’).
– Overboarding: As previously announced, starting in 2022, for non-executive board chairs/lead independent directors and director nominees who hold excessive commitments, as defined above, we may consider waiving our policy and vote in support of a director if a company discloses its director commitment policy in a publicly available manner (e.g., corporate governance guidelines, proxy statement, company website).
These updated policies & guidelines are posted along with other institutional investor policies in our “Investor Voting Policies” Practice Area, so that members can have easy access to policies of various investors in one place. If you aren’t yet a member and want access, email sales@ccrcorp.com.
– Liz Dunshee
The March-April issue of the Deal Lawyers newsletter has been posted online and mailed. Articles include:
– Delaware Chancery Court Issues Highly Anticipated SPAC-Related Decision
– Rule 145: 10 Frequently Asked Questions
– Regulation M: Reminders for Public Company M&A
Remember that, as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers newsletter, we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers newsletter, anyone who has access to DealLawyers.com will be able to gain access to the newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers newsletter including how to access the issues online.
– Liz Dunshee
Yesterday, the SEC announced this 98-page release to re-propose amendments to Reg M that would remove the references to credit rating agencies from existing exceptions provided in Rule 101 and Rule 102. Section 939A of the Dodd-Frank Act directed the Commission to remove references to credit ratings included in certain rules, and this is the SEC’s third attempt for these particular amendments: they were initially proposed in 2008, and then re-proposed in 2011. The Fact Sheet explains what the proposal aims to do:
Proposed Amendments to Regulation M
The Commission proposed to remove the requirement that nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities be rated investment grade by at least one nationally recognized statistical rating organization. In place of that requirement, under Rule 101, the Commission proposed to except (1) nonconvertible debt securities and nonconvertible preferred securities of issuers having a probability of default of less than 0.055%, as measured over certain period of time and as determined and documented using a “structural credit risk model,” as defined in the rule, and (2) asset-backed securities that are offered pursuant to an effective shelf registration statement filed on the Commission’s Form SF-3. The Commission proposed to eliminate from Rule 102 the existing exception for investment grade nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities.
Recordkeeping Requirement
To aid the Commission in its examination and oversight of broker-dealers who are distribution participants or affiliated purchasers and rely on the proposed exception in Rule 101 for certain nonconvertible debt securities and nonconvertible preferred securities, new paragraph (b)(17) of Rule 17a-4 would require those broker-dealers to retain the written probability of default determination supporting their reliance on the exception. Rule 17a-4(b)(17) would require broker-dealers relying on Rule 101’s exception for certain nonconvertible debt securities and nonconvertible preferred securities to preserve, for a period of not less than three years, the first two years in an easily accessible place, the written probability of default determination.
The comment period will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer. We’ll be posting memos in our “Credit Ratings” Practice Area.
– Liz Dunshee
