After several years of increasingly bad news when it comes to D&O premiums, a recent NACD blog post by Marsh’s US D&O Product Lead Matthew McLellan says that things are looking up for companies looking to purchase coverage. Here’s the intro:
For the first time in four years, it is likely that an increasing number of public companies will, on average, experience a year-over-year decrease in their US directors’ and officers’ liability (D&O) insurance premiums in the second half of 2022. Material premium increases have become increasingly rare, and there is a dramatic return to competition in the marketplace as insurers look for new sources of revenue.
Despite a return to competition, the underwriting community remains focused on several risk areas including legal and regulatory trends; activist investors; environmental, social, and governance (ESG) issues; and other challenges that could lead to litigation. Companies should optimize opportunities, but also remain vigilant in their renewal preparations, and work with their brokers to carry out comprehensive reviews of policies and obtain the broadest coverage possible.
The blog goes on to discuss the risks that companies and insurers are confronting, which include stock market volatility, supply chain issues, inflation, heightened cyber threats, continuing high levels of shareholder litigation, and SEC proposals on climate & cybersecurity disclosure are likely to prompt greater regulatory scrutiny. In an environment where risks are increasing but premiums are at least temporarily easing, the blog suggests that companies should focus on optimizing the structure and coverage amounts provided by their D&O insurance programs.
Yesterday, the SEC announced that Jaime Lizárraga had been sworn in as an SEC commissioner to serve a term that expires on June 5, 2027. Commissioner Lizárraga fills the open Democratic seat created by Commissioner Lee’s recent departure. His inauguration follows on the heels of Mark Uyeda’s, who was sworn in on June 30, 2022 for a term expiring on June 5, 2023. Commissioner Uyeda fills the vacant Republican seat created when Commissioner Roisman left.
With the addition of Commissioner Lizárraga, the SEC has its full allotment of five commissioners, which is a place that it hasn’t been all that frequently in recent years.
With many companies filing their second quarter 10-Qs in the upcoming weeks, this Goodwin memo on updating risk factors in a 10-Q is particularly timely. The memo refers to what it characterizes as “better practices” when it comes to updating. This excerpt addresses whether companies that repeat their entire “Risk Factors” section should highlight changes to a particular risk factor:
If a company chooses to update its risk factor disclosure by restating the entire risk factor section from its Form 10-K report or a subsequent Form 10-Q report, we recommend that the company consider whether it would be better to highlight the changes in some manner that makes it more likely that the changes will come to the attention of readers. We believe that this is particularly relevant where the risk factor disclosure extends to several pages or more, which could have the unintended effect of making it difficult for readers to find and absorb the new disclosure about material changes.
Changes could be identified in various ways, such as in an introductory paragraph that refers readers to specific updated paragraphs, by use of footnotes, by use of bold text, or by use of symbols such as an asterisk at the beginning and end of each paragraph that contains changed or new text (which was the way the SEC’s EDGAR system marked changed text in the past).
Other topics addressed include whether to comply with Item 105 of S-K’s requirements (including a risk factors summary for Risk Factors sections exceeding 15 pages) in a 10-Q and issues associated with hypothetical risk factors. The memo also provides a bullet-point list of recent developments that might prompt companies to update risk factors disclosure in their upcoming 10-Q filings.
Cooley’s Cydney Posner recently blogged about on whether companies are making progress in efforts to improve the racial and ethnic diversity of their boards. She cites ISS data indicating that while progress has been made, companies still have a long way to go. Here’s an excerpt from Cydney’s blog on where things stand with the S&P 500:
ISS reports that, in 2022, all boards of companies in the S&P 500 had at least one director that identified as racially or ethnically diverse; in comparison, in 2020, 11% of boards in the S&P 500 had no racially or ethnically diverse directors. In addition, in 2022, 36% had three racially or ethnically diverse board members, compared to 22% in 2020. Similarly, in 2022, 31% had four racially or ethnically diverse board members, compared to only 7% in 2020—an increase of 24 percentage points. The percentage of board seats held by racially or ethnically diverse directors grew from 19% in 2020 to 23% in 2022.
There were, however, differences among different races and ethnicities. For example, persons identifying as Hispanic/Latin American constituted up 18.5% of the U.S. population (according to the April 1, 2020 census), but held only 4% of S&P 500 board seats in 2020 and only 5% in 2022. African-Americans held 9% in 2020 and 12% in 2022; Asians held 5% in 2020 and 6% in 2022.
Russell 3000 companies have also made some progress. The good news is that in 2020, 38% of Russell 3000 companies had no racial or ethnically diverse board members, but that only 10% lacked racial or ethnically diverse directors. The percentage of companies with two or more racially/ethnically diverse directors rose from 29% in 2020 to 55% in 2022 & the percentage of board seats held by racially or ethnically diverse directors grew from 11% in 2020 to 16% in 2022.
Despite this progress, ISS says that diversity efforts still have a long way to go if boards are to “reflect the diversity of their customer base or the demographics of the broader society in which they operate.” It also points out that the long-term trajectory of board diversity initiatives remains to be seen.
I’ve blogged several times about the Musk-Twitter goofiness over on DealLawyers.com. You folks have been spared so far – but your luck has just run out. That’s because the WSJ reported that a recently released comment letter indicates that the Staff questioned whether Musk’s post-signing tweet about his supposed concerns with the number of bot accounts that included the phrase ““[t]his deal cannot move forward” triggered a requirement to amend his 13D filing.
Personally, I think the headline – “SEC Broadens Inquiry Into Elon Musk’s Disclosures” is a little misleading. The Staff’s concerns here are pretty narrowly focused & I don’t think I’d say that the SEC is “broadening” its inquiry, but don’t take my word for it – here’s the response letter from Musk’s lawyers, so you can judge for yourself. In any event, this back & forth with the Staff is a reminder of the perils of negotiating on social media.
Our 58-page Annotated Sample Climate Disclosure, which is now available to members of PracticalESG.com, includes example text and tables, along with annotated guidance on key elements of the proposed disclosure. I would like to acknowledge the efforts and John Jenkins and Lawrence Heim in putting together the sample disclosures, because I think it is enormously helpful to have these sample disclosures as a starting point for the discussion.
There were many takeaways from our Climate Disclosure Event earlier this week, but the biggest takeaway for me was just how difficult compliance with the climate change disclosure rules will likely be and how much advance planning will be necessary even before the SEC adopts the final rules. As my good friend Marty Dunn always used to say, the life of a securities lawyer is always a markup of last year, but the challenge that we face with these rules is that we will have nothing to markup from last year! At least our sample disclosures can provide you with a starting point for comparing what the rules may require with what your company is disclosing today about climate change.
Back in April, I blogged about how Judge Terry Green of Los Angeles County Superior Court found that Assembly Bill 979, which required publicly traded companies based in California to have board members from underrepresented communities, violated the state’s constitution. According to this Law360 article, yesterday Judge Green declined to issue a stay of the Court’s order while the matter is pending on appeal.
California had asked Judge Green to pause the injunction pending appeal, or to at least make the injunction only partially mandatory to allow California to continue the process of gathering data and compiling reports about the diversity of corporate boards and compliance.
In this year of many anniversaries, the twentieth anniversary of the Sarbanes-Oxley Act is fast approaching on July 30. While most remember the Sarbanes-Oxley Act for its focus on auditors and internal controls, the Act and the events that surrounded it changed the face of corporate governance at public companies.
With all that has happened in corporate governance over the past two decades, it is difficult to recall just how low corporate governance standards were in the run-up to the early 2000s corporate scandals that ultimately prompted Congress to enact the Sarbanes-Oxley Act. The Act, and the continuing fallout from Enron, WorldCom and the many other corporate meltdowns of the era, in turn prompted the SEC and the stock exchanges to embark on a frenzied rulemaking and standard-setting effort that set the stage for the robust corporate governance environment that remains with us to this day.
As part of my efforts to document the history of the SEC’s Division of Corporation Finance for the SEC Historical Society’s virtual museum and archive, I will be hosting a program on July 21 from 2:00 to 3:30 pm eastern time titled The Sarbanes-Oxley Act at 20: A Corporate Governance Legacy. This program will feature Harvey Pitt, Alan Beller, Shelley Parratt and Annemarie Tierney. I encourage you to register for this virtual event, it will be a very interesting discussion.
At an open meeting yesterday, the SEC adopted rule amendments reversing certain changes to the proxy rules that were adopted just two years ago to address concerns with proxy voting advice from proxy advisory firms. The Commission’s announcement of the rule changes notes:
The final amendments rescind two rules applicable to proxy voting advice businesses that the Commission adopted in 2020. Specifically, the final amendments rescind conditions to the availability of two exemptions from the proxy rules’ information and filing requirements on which proxy voting advice businesses often rely. Those conditions require that: (1) registrants that are the subject of proxy voting advice have such advice made available to them in a timely manner; and (2) clients of proxy voting advice businesses are provided with a means of becoming aware of any written responses by registrants to proxy voting advice. Institutional investors and other clients of proxy voting advice businesses have continued to express concerns that these conditions could impose increased compliance costs on proxy voting advice businesses and impair the independence and timeliness of their proxy voting advice.
The final amendments also delete the 2020 changes made to the proxy rules’ liability provision. Although the 2020 changes were intended to clarify the application of this liability provision to proxy voting advice, they instead created a risk of confusion regarding the application of this provision to proxy voting advice, undermining the goal of the 2020 changes. The final amendments address the confusion while affirming that proxy voting advice generally is subject to liability under the proxy rules.
The SEC also rescinded guidance that the Commission issued in 2020 to investment advisers regarding their proxy voting obligations.
The adopting release points out that this rulemaking did not represent a wholesale reversal of the 2020 rulemaking, noting:
Proxy voting advice generally remains a solicitation subject to the proxy rules, including liability under Rule 14a-9 for material misstatements or omissions of fact;
In order to rely on the exemptions from the proxy rules’ information and filing requirements set forth in Rules 14a-2(b)(1) and (3), proxy advisory firms will still have to satisfy Rule 14a2(b)(9)’s conflicts of interest disclosure requirements; and
The deletion of Note (e) does not affect the scope of Rule 14a-9 or its application to proxy voting advice.
The Commission notes that final amendments reflect the fact that “our thinking has evolved with respect to the Rule 14a-2(b)(9)(ii) conditions and Note (e) to Rule 14a-9, informed, in part, by the concerns expressed by PVABs’ clients and other investors that were among the primary intended beneficiaries of the 2020 Final Rules.”
Commissioners Peirce and Uyeda did not support the amendments.
Yesterday, the SEC also proposed amendments to Rule 14a-8, the shareholder proposal rule. The proposed amendments were not as far-reaching as I had suspected, addressing just three of the 13 substantive bases for excluding shareholder proposals under Rule 14a-8(i).
Under Rule 14a-8(i)(10), a company can exclude a shareholder proposal that “the company has already substantially implemented.” The proposed amendments would introduce a new test for assessing whether a company can exclude a proposal on this basis: whether or not “the company has already implemented the essential elements of the proposal.”
Under Rule 14a-8(i)(11), a company can exclude a proposal that substantially duplicates another proposal that will appear on the company’s proxy card. The SEC’s proposing release explains that, in assessing whether a proposal substantially duplicates another, the Staff historically has looked at whether a new proposal shares the same “principal focus” as an earlier submitted proposal. The proposed new test will assess whether potentially duplicative proposals address the same subject matter and seek the same objective by the same means.
Under Rule 14a-8(i)(12), a company may exclude from its materials a shareholder proposal that addresses “substantially the same subject matter as a proposal . . . previously included in the company’s proxy materials within the preceding five calendar years” if the matter was voted on at least once in the last three years and received support below specified vote thresholds on the most recent vote. The proposed amendments would provide that a proposal constitutes a resubmission if it substantially duplicates another proposal that was previously submitted for the same company’s prior shareholder meetings under the same test specified in Rule 14a-8(i)(11).
Unlike the proxy voting advice rulemaking, the Commission proposal does not seek to revisit the amendments to the procedural requirements of Rule 14a-8 that were adopted back in September 2020.
While the proposals do not seek to delve into some of the more controversial and thorny bases for exclusion, the proposing release does note:
In addition, while we do not propose to amend Rule 14a-8(i)(7),13 the ordinary business exclusion, at this time, we reaffirm the standards the Commission articulated in 1998 for determining whether a proposal relates to ordinary business for purposes of Rule 14a-8(i)(7).
Comments are due 30 days after publication in the Federal Register or September 12, 2022, whichever is later.
