Jim McRitchie recently blogged about his review of a survey on virtual annual meeting practices conducted by the Interfaith Center for Corporate Responsibility. One of the questions asked by the survey was “How many seconds did shareholders have to vote after the last proposal was presented?” Jim says that the answer is “not many”:
The ICCR survey documents that 10 out of 31 companies allowed 0-10 seconds to vote at annual meetings after proposals were presented. 5 allowed up to 30 seconds. 6 allowed 50-60 seconds and 10 allowed 2 minutes or more to vote.
As someone who did annual meetings for public company clients for 35 years, I can’t say I’m surprised at the results. Pre-COVID, once you got outside the realm of the Fortune 500, it was the rare annual meeting that attracted more than a handful of people – and most of them were the company’s service providers. That meant that the top priority for the management & the company’s lawyers wasn’t shareholder engagement, but instead making sure that all the required legal boxes were checked off as quickly and painlessly as possible. That’s certainly how I approached the process.
I think this traditional approach is becoming increasingly obsolete as virtual or hybrid meetings become ever more prevalent. With many more eyes on what happens in the meeting than there used to be, fairness points like the one Jim raises will become an increasingly important factor in how investors perceive a company.
The potential risks of litigation that might arise out of the SEC’s climate change proposals are among the greatest concerns that public companies & their advisors have about the adoption of these sweeping new disclosure obligations. This Cleary memo provides an overview of some of the specific federal and state claims that might arise under the new disclosure regime, and also discusses some of hurdles that plaintiffs might face in bringing those claims. This excerpt addresses the challenges of establishing the “materiality” of the new disclosures:
At least in the near term, the materiality element may pose the most significant challenge for potential plaintiffs. Disclosures are considered “material” for these purposes if there is a substantial likelihood that a reasonable investor would consider the disclosed information important in deciding how to vote or make an investment decision. Under this standard, the impact of any given piece of information on a company’s stock price generally is a key element of the materiality analysis under current law.
But it is not clear that the market would necessarily consider all of the disclosures required by the SEC’s proposed rules to be important so as to make them “material” under this historical test. Indeed, certain disclosure requirements seem to be based not on what a “reasonable investor” would view as important, but instead on what general stakeholders and the greater public would find significant. For example, the Scope 3 emissions disclosures seem to be based on general concern over climate accountability, rather than the company’s own long-term financial value.
I think this is a great point, but there’s also some authority out there to the effect that information required by SEC line-items is presumptively material. See, e.g., Howing Co. v. Nationwide, (6th Cir. 1991); In re Craftmatic Securities Litigation, (3d. Cir. 1989) (“[d]isclosures mandated by law are presumably material”). Like the author of this law review article, I think these courts are confusing materiality with the duty to disclose, but as Sgt. Phil Esterhaus used to say in the great 1980s cop drama Hill Street Blues – “let’s be careful out there.”
Cleary’s memo doesn’t address claims that the SEC’s proposed climate disclosure rules are unconstitutional, but this recent WSJ opinion piece shows that opponents of the proposal continue to make that argument.
I’m far from a crypto enthusiast, so what little I know about “Digital Autonomous Organizations,” or DAOs, is pretty much attributable to my efforts to keep tabs on The Wu-Tang Clan’s entrepreneurial activities. I suspect that some of you may be in the same boat. Fortunately, this Fried Frank “DAO Primer” offers all of us a chance to get more up-to-speed on DAOs, starting with very basic topics like “How DAOs Work”:
A DAO is an unincorporated business organization that operates on blockchain software and is run directly by those who have invested in it (the “contributors” or “members”). It is essentially an internet community with a shared purpose and the equivalent of a shared online bank account. Through a DAO, people can raise money (potentially large amounts) and organize energy aimed at a joint project, without a formalistic corporate overlay. DAOs have no physical headquarters, offices, or bank accounts; there are no directors, hired managers, other leaders, or employees.
A DAO’s governance rules and the parameters for its decision-making are encoded into the blockchain software on which it runs, making management essentially self-executing (through so-called “smart contracts” created by the coding); and all of the DAO’s transactions are immutably recorded on the blockchain, providing transparency to its members. Once a DAO’s purpose and rules are established and the code reflecting them is created, there is no need for human involvement unless a member wishes to propose for a vote of the members any change to the DAO’s purpose or the encoded rules (such as those governing how the DAO’s funds are to be spent).
The primer goes on to discuss a variety of other topics, including the purposes for which DAOs are used, how they raise funds, how investors make a profit, their advantages and disadvantages, and the various legal issues associated with DAOs.
Mark your calendar for our webcast, “Cryptocurrency: Making Sense of the State of Play” – coming up on Thursday, October 6th. Hear from Ava Labs’ Lee Schneider, Liquid Advisors’ Annemarie Tierney, Cooley’s Nancy Wojtas and Coinbase’s Jolie Yang about current regulatory posturing and risks, structuring deals & products in the current regulatory environment, lessons from recent high-profile token collapses, and guidance on how to navigate uncertainties.
This webcast is free to members of TheCorporateCounsel.net and is available to non-members for $595. If you aren’t already a member, 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.
Happy “International Talk Like a Pirate Day” to those who celebrate. In honor of the holiday, I’m going to do something I rarely do – recommend a law review article to you just because it’s really interesting. The last time I did this was with Sarah Haan’s remarkable piece on how the rise of women investors in the early 20th century influenced the evolution of modern corporate governance concepts. Today – in keeping with Talk Like a Pirate Day’s nautical theme – I’d like to recommend Prof. Robert Anderson’s new article, “The Sea Corporation.”
In law school, we were all taught that limited liability and the other attributes surrounding a corporation were unique to that entity and arose in connection with its creation. This article says that just isn’t the case, and that maritime law’s treatment of ships and their owners was remarkably similar. Here’s an excerpt from the abstract:
Commentators widely attribute the corporation’s success to a set of features thought to be unique to the corporation, including limited liability, transferable shares, centralized management, and entity shielding. Indeed, the consensus among economic and legal historians is that these essential corporate features created a unique economic entity that rapidly displaced the obsolete partnership.
This Article argues that these economic features were not unique to the corporation, nor did they first develop in the business corporation. Over many centuries, the maritime law developed a sophisticated system of business organization around the entity of the merchant ship, creating a framework of legal principles that operated as a proto-corporate law. Like modern corporate law, this maritime organizational law gave legal personality to the ship, limited liability, transferable shares, centralized management, and entity shielding. The resulting “sea corporations” were the closest to a modern corporation that was available continuously throughout the 17th through early 19th centuries in Europe and the United States.
Prof. Anderson’s conclusion is that the independent emergence of this legal model for merchant ships shows that it was external commercial needs that drove the development of the key legal attributes we associate with the corporation. The corporation wasn’t a unique technological development that enabled the industrial revolution, but simply a more versatile version of what the maritime law had already developed.
I wrap up my week of conference previews with “the big event” coming up at our “2022 Proxy Disclosure Conference.” At the opening of the virtual Conference on Wednesday, October 12th, I will be interviewing Renee Jones, Director of the SEC’s Division of Corporation Finance.
Renee Jones joined Corp Fin in June 2021. Prior to joining the Staff, Renee served as Professor of Law and Associate Dean for Academic Affairs at Boston College Law School, where she taught and wrote in the areas of corporate law, securities law and corporate governance. Renee has been leading Corp Fin through a very active time, with many of the rulemakings on the SEC’s agenda focused on Corp Fin matters. As I have done at past Conferences, I will interview Renee about the latest developments in Corp Fin so that you can be fully up to speed on what to expect from the SEC. This is definitely the event you do not want to miss with all that is going on at the SEC right now.
Focusing on our upcoming Conferences this week brought back a lot of good memories for me about our past Conferences. As I mentioned earlier this year, I have been involved with these publications for 15 years now, and over that time I have had the honor of participating as a “regular” at our annual Conferences.
As you may know, I participate in a lot of conferences and CLE programs, but I really think our Conferences are special and definitely worth checking out if you have not attended in the past. We always have an amazing group of extraordinary panelists, and they bring so many unique perspectives to the conversation. We pack a great deal of information into a few short days, but we do so in a way that will keep you engaged. And, as I have blogged about before, we sometimes have a good time while spreading the knowledge. With that, I encourage you to attend and I look forward to seeing you (virtually) at the Conferences!
Yesterday, SEC Chair Gary Gensler testified before the United States Senate Committee on Banking, Housing, and Urban Affairs. In his prepared remarks, Gensler discussed a wide range of topics, including his views on issuers and issuer disclosure. He stated:
For the last 90 years, our capital markets have relied on a basic bargain. Investors get to decide which risks to take as long as companies provide full, fair, and truthful disclosures. Congress tasked the SEC with overseeing this bargain. We do so through a disclosure-based regime, not a merit-based one. Over the decades, we have updated our rule set to elicit disclosures of information relevant to investors’ decisions.
Increasingly, over the last number of years, investors are making investment decisions based upon factors that include the risks and opportunities related to climate and cybersecurity. Today, climate-related factors and risks as well as cybersecurity risks both can affect a company’s bottom line and its future, and therefore an investor’s decision to buy, hold or sell a security or how to vote a proxy. Today, investors are already making decisions based upon information about climate and cyber risks. Hundreds of companies are already disclosing such information, pursuant to disparate frameworks, in a manner that lacks consistency and reliability.
With respect to crypto, Gensler was pretty clear on his views about the applicability of the securities laws to tokens:
Of the nearly 10,000 tokens in the crypto market, I believe the vast majority are securities. Offers and sales of these thousands of crypto security tokens are covered by the securities laws, which require that these transactions be registered or made pursuant to an available exemption. Thus, I’ve asked the SEC staff to work directly with entrepreneurs to get their tokens registered and regulated, where appropriate, as securities. Given the nature of crypto investments, I recognize that it may be appropriate to be flexible in applying existing disclosure requirements.
Gensler also addressed a number of other areas the SEC is focused on maintaining the “gold standard” of regulation.
The upcoming proxy season promises to be a doozy. We have the SEC’s new pay versus performance disclosure rules. There is a completely new approach to shareholder proposals at the SEC, as evidenced by Staff Legal Bulletin 14L and the experiences with Rule 14a-8 no-action requests during the 2022 proxy season. We have the SEC’s flip flop on the rules applicable to voting advice provided by the proxy advisory firms. And we have the relentless pressure on a wide range of ESG topics, executive compensation and corporate practices coming from institutional investors and activist investors. With all of this brewing for 2023, you definitely do not want to miss the “2022 Proxy Disclosure Conference” and the “19th Annual Executive Compensation Conference.”
I look forward to joining the SEC All-Stars for our hour-long Proxy Season Insights panel on Wednesday, October 12. The All-Stars joining me on this panel are Sonia Barros, Meredith Cross, Alan Dye and Raquel Fox. We will be covering a wide range of topics, including:
I plan to address proxy plumbing and voting issues, because companies must be attentive to these important issues when drafting their proxy disclosures and planning for their annual meeting. I will discuss the efforts of the End-to-End Vote Confirmation Working Group and others during the 2022 proxy season to improve the transparency and reliability of the voting process through end-to-end vote confirmation and early-stage vote entitlement reconciliation. I also expect to address the impact of BlackRock’s “Voting Choice” program and how pass-through voting could change your approach to proxy disclosure and engagement. I also plan to address the NYSE’s recent rule change with respect to the treatment or abstentions, as well as persistent quorum issues that smaller companies face due to changing approaches to discretionary voting.
This SEC All-Stars panel, along with the rest of the panels at the “2022 Proxy Disclosure Conference” and the “19th Annual Executive Compensation Conference,” will provide you with the guidance that you need to successfully navigate the proxy season, so I encourage you to register today. Here is the full agenda – and here is more information about our expert speakers. In addition, as I mentioned earlier this week, check out the agenda for our “1st Annual Practical ESG Conference” – which is happening virtually on Tuesday, October 11th. This event will help you avoid ESG landmines and anticipate opportunities. You can bundle the Conferences together for a discount.
– The pay versus performance journey
– How the new requirements differ from what companies are disclosing today
– Emerging interpretive issues
– Pitfalls that companies should consider as they prepare for the new disclosure
– The expected impact on the overall approach to pay-for-performance disclosure
I encourage you to check out this podcast – Ron and I had a great discussion of these complex new disclosure requirements and the potential challenges that you may face with only a few months until compliance is required for many companies.
With all of the focus on pay versus performance at the moment, you can be sure that we will continue to provide all of the practical resources that you will need in the coming months to comply with the new disclosure requirements.
Coming up in less than a month, experts from FW Cook, Latham & Watkins, Ropes & Gray and Weil, Gotshal & Manges will share their perspectives and preparations in “Pay Versus Performance: Key Compliance Steps” at our “2022 Proxy Disclosure & 19th Annual Executive Compensation Conferences.” This virtual session on October 14th will lay out what you need to do now to comply with the final rules, and what impacts to expect on compensation programs, engagements and voting outcomes.
Register for our “2022 Proxy Disclosure & 19th Annual Executive Compensation Conferences” today! In 18 virtual panels over the course of 3 days, our Conferences provide practical guidance about rule changes such as the pay versus performance rules, Staff interpretations, emerging disclosure risks, investor and proxy advisor positions, executive pay expectations, the board’s role, and more.
