August 5, 2022
The SEC recently announced the appointment of Anthony (Tony) C. Thompson to a second term as a Board Member of the PCAOB. Thompson joined the Board at the beginning of this year, and his second term will run until October 24, 2027.
– Dave Lynn
August 4, 2022
It is hard to believe it is that time of year already – yesterday ISS announced the launch of its Annual Global Benchmark Policy Survey, which is a key part of the overall process for formulating potential policy changes. The survey is slated to close on August 31, 2022, at 5pm ET.
This year’s survey includes a number of questions concerning climate change risk management, including climate-related board accountability, climate transition plans and management “say on climate” resolutions, climate risk as a critical audit matter, and financed emissions for companies in the financial sector. For the U.S. market, the survey includes questions that cover potential benchmark policy exemptions for multi-class capital structures, handling of problematic governance structures, and views on calls for third-party racial equity and civil rights audits.
In addition to the annual policy survey, ISS will conduct regional and topic-specific roundtables and conference calls as part of its annual policy development process, and will then publish for comment the major final proposed changes to ISS policies for 2023.
– Dave Lynn
August 4, 2022
Effective August 1, the Delaware General Corporation Law has been amended to reflect several significant changes. As this Wilson Sonsini memo notes, the changes will allow Delaware corporations to adopt charter provisions to exculpate officers from personal liability in certain contexts, and the amendments will also give corporations greater flexibility in delegating authority to officers and others to grant stock options and other rights to acquire stock. With regard to the exculpation provision, which John blogged about back in April, the memo notes:
In recent years, stockholder plaintiffs have increasingly named officers as defendants in fiduciary duty litigation. This is in part because officers have historically lacked certain protections that directors have—including insofar as the DGCL long provided that a corporation’s charter could exculpate directors from personal liability for breaches of the fiduciary duty of care but did not authorize such exculpation for officers. Effective August 1, Delaware corporations now can adopt charter provisions that will, in effect, allow officers to be exculpated from breaches of the fiduciary duty of care in certain contexts. Notably, under the amendments, officers now can be exculpated for direct claims by stockholders, which commonly arise in the M&A context. The new amendments will not permit such exculpation of directors in the context of derivative claims, brought by or in the right of the corporation. The statute further provides that the officers who may be exculpated in this manner are only officers who at the time of an act or omission as to which liability is asserted are deemed to have consented to service of process to the registered agent of the corporation as contemplated by 10 Del. C. § 3114(b) (generally, executive officers, officers identified in the corporation’s SEC filings as one of the corporation’s most highly compensated executive officers at the time of alleged wrongdoing, and officers that have agreed in writing to constitute an officer for this purpose). Despite these limitations, the incremental protection available under the amendments should be helpful for officers and in mitigating certain types of stockholder litigation.
On the equity award front, the DGCL amendments harmonize the statutory provisions for issuing stock and granting options and other rights. Under these amendments, the board or a board committee can now permit officers and other agents to have expanded authority in the context of granting options and rights, subject to certain parameters. These changes will provide increased flexibility in designing and implementing equity award plans.
Under the recently effective amendments to the DGCL, a corporation’s stockholder list will no longer need to be made available for inspection during a meeting of stockholders, but it will still need to be available for inspection for a 10-day period prior to the meeting. Further, the appraisal statute has been amended to allow a beneficial owner of stock to demand appraisal directly instead of relying on the record holder, and the stockholder approval required to convert a Delaware corporation to a foreign corporation or any other entity has been lowered from unanimous approval to majority approval. The DGCL amendments also make various adjustments to ease the process for non-United States entities to domesticate to Delaware.
– Dave Lynn
August 4, 2022
In the latest Deep Dive with Dave podcast, John and I talk about the topics we cover in the July-August 2022 issue of The Corporate Counsel. We discuss the SEC’s recent proxy advisory firm and Rule 14a-8 rulemaking, lessons from case law addressing forward-looking statements and auditor independence. Thanks for listening to the Deep Dive with Dave podcast!
If you do not subscribe to The Corporate Counsel, please email us at sales@ccrcorp.com or call us at 800-737-1271.
– Dave Lynn
August 3, 2022
Spencer Stuart recently published its 2022 S&P 500 Board Diversity Snapshot, which notes some progress with increasing the diversity of boards of directors at the largest companies. The Snapshot notes that 72% of the incoming S&P 500 class of directors come from historically underrepresented groups — defined as individuals who self-identify in one or more of the following categories: women, underrepresented racial/ethnic group or the LGBTQ+ community. The Snapshots notes that year-over-year percentages grew only modestly from 2021, when 30% of directors were women and 21% were from underrepresented racial and ethnic groups. In 2022, 32% of all S&P 500 directors are women and 22% come from historically underrepresented racial and ethnic groups — defined as Black or African American, Asian, Hispanic or Latino/a, two or more races/ethnicities, American Indian/Alaska Native, and Native Hawaiian or other Pacific Islander.
Spencer Stuart’s Snapshot notes that 50% of S&P 500 boards have adopted a policy like the Rooney Rule to include individuals from underrepresented groups in the candidate pool when recruiting directors, up from 39% last year. The Snapshot also notes disclosure about board diversity continues to improve, with 93% of S&P 500 companies disclosing their racial/ethnic composition, with 41% of those companies identifying directors from underrepresented racial and ethnic groups by name for those who volunteered to self-identify.
If you are not already a member of TheCorporateCounsel.net with access to this resource and all of our other great memos, checklists and handbooks, sign up now and take advantage of our no-risk “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The prices for an annual membership increase on September 1st, so act now to lock in the best deal!
– Dave Lynn
August 3, 2022
One topic that often comes up when discussing board refreshment and board diversity is the existence of classified boards. With a classified, or staggered, board, the directors are divided into roughly equal classes and are typically elected for three year terms, so that only the directors in each class are up for re-election at the annual meeting, rather than the full board. Critics say that classified boards are not in the interests of shareholders because the anti-takeover effect of a classified board can entrench management and discourage attractive takeover offers, while also discouraging accountability for the actions of directors.
Despite years of negative perceptions about classified boards, they still have not gone the way of the dinosaur. The prevalence of classified boards has waned among the largest companies, with only 12% of S&P 500 companies having classified boards today, as compared with 60% in 2000. In the broader market, however, classified boards are more common, with 43% of Russell 3000 companies have classified boards today.
What keeps the classified board in place at so many companies, despite the persistent investor dissatisfaction with classified boards? A classified board remains one of the strongest defenses against shareholder activism, and that makes the practice one of the last “problematic” governance practices that companies want to give up. With a classified board, an activist investor can only replace a majority of the directors serving on the board if it is able to wage a successful proxy fight over the course of multiple annual meetings. In contrast, where there is no classified board, an activist investor can replace all of the directors by launching a proxy contest at one annual meeting.
Further, despite the fact that institutional investors largely look askance at classified boards, their approach to classified boards is generally “transactional.” If a company or shareholder puts forth a proposal to eliminate the classified board, many institutional investors (and the proxy advisors) will vote in favor of that proposal, and those proposals generally receive very strong shareholder support. With that said, these same investors are unlikely to submit shareholder proposals seeking to dislodge the classified board or take other “aggressive” action, despite the negative perception of the practice. One institutional investor, Invesco, will generally vote against the incumbent governance committee chair or lead independent director if a company has a classified board that is not being phased out, but that more active approach to expressing dissatisfaction with a classified board tends to be an outlier.
Considering the removal of a classified board provision requires a careful consideration of the pros and cons by the board, with the full recognition that once the classified board is eliminated, it is unlikely to ever be reinstated. The board should carefully assess the company’s anti-takeover profile and the sentiment of the company’s key investors when weighing whether to phase-out a classified board, while also considering the overall market environment and the company’s rationale for retaining the classified board. Some feel strongly that classified boards promote stability and continuity on the board and promote a long-term strategic outlook, and even some institutional investors (such as BlackRock) may be open to considering the board’s rationale for retaining the classified board if the topic shows up on the company’s ballot. Ultimately, the board should periodically evaluate the classified board structure in the context of an overall evaluation of the company’s governance practices and in light of evolving “best practices” for similar companies.
– Dave Lynn
August 3, 2022
I look forward to joining many colleagues and friends at our rapidly approaching Conferences, which will occur virtually this year on October 11–14.
I am particularly looking forward to our 1st Annual PracticalESG Conference, which will kick things off on October 11 with an action-packed agenda full of practical guidance on the most important ESG issues that companies are facing. I will be speaking with Corp Fin Director Renee Jones at our two-day 2022 Proxy Disclosure Conference, and participating in panels that you do not want to miss – “The SEC All-Stars: Proxy Season Insights” and “ESG Disclosures: Staying Out of Hot Water.”
I also look forward to our 19th Annual Executive Compensation Conference, where I will be joined by the SEC All-Stars to discuss your favorite executive compensation nuggets. With all that is going on today at the SEC and in the world, you do not want to miss the valuable and timely guidance that we will provide at this year’s Conferences.
The time is right for you to sign up for the Conferences today!
– Dave Lynn
August 2, 2022
Last week the SEC re-proposed rule amendments originally proposed in 2015 to narrow an exemption from the requirement to be a FINRA member that is applicable to certain proprietary trading firms.
Exchange Act Rule 15b9-1 provides an exemption under which certain SEC-registered dealers can engage in unlimited proprietary trading of securities on any national securities exchange of which they are not a member or in the over-the-counter market without triggering the requirement to be a FINRA member. The SEC adopted this exemption over forty years ago to facilitate limited proprietary trading by regional specialists and floor brokers conducted off their home exchange. The trading world has changed quite a bit in the ensuing four decades, moving from floor-based to mostly electronic. During that time, SEC-registered dealers have emerged which engage in significant, proprietary trading of off-member-exchange securities, including in the U.S. Treasury securities market, and these dealers are not FINRA members in reliance on Rule 15b9-1.
Under the re-proposal, an SEC-registered broker or dealer would be required to join FINRA if it effects securities transactions other than on an exchange of which it is a member unless:
– Dave Lynn
August 2, 2022
Over the past few weeks, we have seen a number of reflections on the impact of the Sarbanes-Oxley Act on its twentieth anniversary. Last week, Liz noted the remarks of Chair Gensler at a program hosted by the Center for Audit Quality, and I noted a program that I had the honor of moderating for the SEC Historical Society. Last week, the Council of Institutional Investors hosted PCAOB Chair Erica Williams for remarks on the twentieth anniversary of SOX and the establishment of the PCAOB.
After recounting the events that led up to the enactment of SOX, Chair Williams noted the many accomplishments of the PCAOB and the overall impact of the auditing regulator on the quality of audits. Going forward, Chair Williams outlined the three key areas that the PCAOB is addressing: (i) modernizing standards; (ii) enhancing inspections, and (iii) strengthening enforcement. On the standard-setting front, Chair Williams noted:
When the PCAOB was first getting off the ground in 2003, it adopted existing standards that had been set by the auditing profession on what was intended to be an interim basis.
Twenty years later, far too many of those interim standards remain unchanged.
The world has changed since 2003. And our standards must adapt to keep up with developments in auditing and the capital markets.
Our current short-term and mid-term projects will address more than half of the remaining interim standards from 2003.
And we don’t intend to stop there.
Chair Williams went on to discuss the PCAOB’s ambitious standard-setting agenda, as well as efforts to enhance inspections. Chair Williams also addressed an aggressive enforcement approach, noting “[w]e intend to use every tool in our enforcement toolbox and impose significant sanctions, including substantial penalties, to ensure there will be consequences for putting investors at risk.”
– Dave Lynn
August 2, 2022
When participating in the SEC Historical Society’s SOX anniversary program a few weeks ago, I was struck by one topic in particular – the changes to the SEC review process that SOX brought about. Section 408 of the Sarbanes-Oxley Act required that the SEC review every public company no less frequently than once of every three years, and that directive resulted in a significant expansion of Corp Fin and reinvention of the work of the Division in a way that lives with us to this day.
The events that led up to the enactment of the Sarbanes-Oxley Act principally involved accounting fraud, so Corp Fin inevitably became a very accounting-focused Division, with the review of public company filings becoming particularly focused on the financial statements and related disclosure. It was very interesting to hear Shelley Parratt and Alan Beller recount the Herculean efforts that were necessary to actually hire the right people to build out a reconstituted Corp Fin and to quickly stand up a review program that could meet the SOX directive.
Looking back, the ramped up SEC reviews of periodic reports really changed the relationship between public companies and the SEC, as the prospect for a comment letter significantly increased. At the same time, the enhanced review program and the enhanced disclosures in SOX’s wake meant that the SEC could adopt the Securities Offering Reform changes just a few years later, which I think everyone can agree has made things much easier when larger companies want to raise capital. It is all an important legacy that is useful to remember today now that SOX has turned 20 years old.
– Dave Lynn
