In this 24-minute episode of the ““Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed Lily Yan Hughes, who is Chair of DirectWomen and Assistant Dean at Syracuse University College of Law. We discussed:
1. Lily’s career path, including her leadership of legal teams at Arrow Electronics, Public Storage and Ingram Micro, and her current roles with DirectWomen and NAPABA.
2. DirectWomen’s mission to increase the representation of women lawyers on corporate boards, and the criteria and steps for being involved.
3. The importance of adapting to different subject areas and demands.
Significant geopolitical issue that companies need to be monitoring right now, and how to help boards and businesses navigate them.
4. What law schools and industry organizations can do to prepare lawyers to advise on business risks and opportunities.
5. What Lily thinks women in the corporate governance field can add to the current conversation on the societal role of companies.
To listen to any of our prior episodes of Women Governance Trailblazers, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
Here’s a scary stat from a Bain CFO survey that I shared last week on the Proxy Season Blog:
There are now about 1,000 activist campaigns per year, and 25% of CFOs expect their company to be a target in the next 2 years.
This Skadden memo says that lengthy director tenures are an increasingly important factor in activists’ decisions to target a company – and they aren’t doing companies any favors when a contested election goes to a vote, either. Here are the key takeaways:
– Proxy advisory firms and institutional investors increasingly view tenures over nine years as too long, questioning the independence of directors who have served longer than that.
– Board refreshment is a frequent demand of activists, so companies may find themselves vulnerable to activist campaigns if they have very long-serving directors.
– As boards review their own composition for skills and other attributes, they should explain to investors the value that long-serving directors bring to the board.
– While few U.S. companies have formal tenure limits, age limits are more common but less favored by proxy advisory firms.
The memo says that 67% of activist campaigns since 2021 have targeted companies with three or more directors who have served 10 years or more, according to Evercore’s Third Quarter 2024 Quarterly Review. As that last point above alludes to, recent survey results indicate that mandatory retirement is still a widely used tool for board refreshment – but companies are also amping up their evaluation practices.
The National Association of Manufacturers has filed its brief to appeal a February decision from the D.C. Federal District Court that would vacate the SEC’s 2020 rule to regulate proxy advisors. The rule was premised on the notion that proxy advisor services are a “solicitation” under Rule 14a-1 – and are exempt from information & filing requirements only if they comply with certain conditions, including giving companies an opportunity to review & respond to voting recommendations.
This blog from Cooley’s Cydney Posner reports details from NAM’s brief. Here’s an excerpt:
NAM professed that, in its statutory analysis, the district court made “three fatal errors.” First, NAM claimed, the district court failed to take into account “Congress’s express delegation of authority to the SEC to define statutory terms like ‘solicit.’” Citing Loper Bright (see this PubCo post), NAM contended, “when Congress expressly gives an agency definitional authority, the court must ‘independently identify and respect such delegations of authority, police the outer statutory boundaries of those delegations, and ensure that agencies exercise their discretion consistent with the APA.’”
In adopting its definition of “solicit”—a definition that “falls within the word’s acknowledged range of meanings”—the SEC was acting pursuant to Congress’s delegation, NAM asserted. As a result, NAM argued, the district court “should have ‘respect[ed]’ Congress’s explicit delegation, not overridden it in favor of a narrower interpretation.” This case, NAM argued, “presents a question of statutory construction: whether the SEC’s definitional amendment regarding ‘solicit‘ is consistent with the Exchange Act. That is the Court’s domain, not the SEC’s.”
Second, NAM looked to the “ordinary tools of statutory interpretation” to find a broad meaning for the term “solicit”: according to NAM, this broad scope is supported by contemporaneous authorities, the structure of Section 14(a), the “historical circumstances and remedial purpose of the Exchange Act,” and the “near-century worth of enforcement.”
Third, NAM contended that “the district court rewrote the statute by concluding that the SEC may only regulate proxy solicitors who have an interest in the underlying corporate ballot measure. The Exchange Act contains no such requirement.” Nothing about the term “solicit,” NAM argued, necessarily implies that the solicitor has an underlying interest in the matter submitted for a vote. “If a person asks a shareholder for their proxy—soliciting it in the most literal sense—and then votes based on a coinflip, that person would surely be subject to SEC regulation, despite lacking an interest in the measure’s outcome.
The district court’s conclusion to the contrary yields disastrous and absurd results. The Court should reverse.”
It’s not clear where we’ll go from here with this case and with proxy advisor regulation in general. The 2020 rule was adopted when Jay Clayton chaired the SEC – it was welcomed by companies and resulted from years of advocacy. Unsurprisingly, ISS promptly challenged the rule (and guidance that had preceded it), but the litigation has inched along and been confusing to follow, in part because the SEC partially repealed the rules in 2022. The rollback generated its own wave of lawsuits in the 5th Circuit – with the most recent decision on that front being that the SEC’s 2022 repeal was arbitrary & capricious and the 2020 rule should stay in place. So, that 5th Circuit decision was somewhat at odds with the one that NAM is challenging here, from the D.C. District Court.
Cydney notes that for this case, ISS’s brief is due in mid-January. The SEC had been aligned with NAM in this litigation, but it dropped out of the appeal last spring. This Bloomberg Law article says that the U.S. Chamber of Commerce has filed an amicus brief in support of NAM’s positions.
In their latest “Understanding Activism with John & J.T.” podcast, John and J.T. Ho were joined by Sean Donahue. Sean is Chair of the Public Company Advisory practice and Co-Chair of the Shareholder Activism & Takeover Defense practice at Paul Hastings, and his practice focuses on counseling public companies and their boards of directors on shareholder activism and takeover defense, mergers and acquisitions, capital markets transactions, securities regulation, and corporate governance matters.
Topics covered during this 35-minute podcast include:
How exempt solicitations differ from conventional proxy solicitations
Common exempt solicitation scenarios and when and how companies should respond
Will the trend toward use of exempt solicitations by pro- and anti-ESG proponents continue?
The goals of a typical “vote no” campaign and how these campaigns typically unfold
Impact of majority voting standards on the effectiveness of vote no campaigns
Defense strategies for vote no campaigns and how they differ from those used in a traditional proxy contest
What “zero slate” campaigns are and how they work
Potential advantages and disadvantages of a zero slate campaign for an activist
How companies should adjust defense strategies to address the threat of of a zero slate campaign
Are zero vote campaigns activism’s next big trend?
John and J.T.’s objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. They’re continuing to record new podcasts, which are filled with practical and engaging insights. I’ve really been enjoying them. Stay tuned for more!
We’re back from the holiday weekend and somehow heading into the final month of 2024. I don’t know about you, but I’ve come down with a case of the Mondays. So, it seems fitting to cover a topic that can sour even the best of days: delistings. The good news is, we’ve also got some tips for righting the ship.
This Honigman memo reports that more companies have been receiving notices of noncompliance with the Nasdaq Capital Market’s minimum stockholders’ equity requirement as the exchange reviews listed companies’ latest quarterly filings. Here’s an excerpt:
Nasdaq evaluates companies’ stockholders’ equity for purposes of compliance with the equity standard on a quarterly basis by reviewing the balance sheet data included in a company’s most recently filed Annual Report on Form 10-K or Quarterly Report on Form 10-Q. If the disclosed amount of stockholders’ equity is less than $2.5 million and the company also fails to meet the Nasdaq Listing Rule 5550(b)’s market value standard and net income standard, then Nasdaq will deliver a notice of deficiency to the company. Typically, such notice of deficiency is delivered within one business day to one calendar week following the company’s most recent Form 10-K or Form 10-Q filing. After receiving the notice of deficiency, the company has four business days to file a Current Report on Form 8-K announcing the receipt of the notice (as required both by Nasdaq rules, and Item 3.01 of Form 8-K). The Form 8-K deadline is based on the date that Nasdaq’s notice is delivered, and not on the date of filing of the Form 10-K or Form 10-Q.
With respect to the deficiency itself, the company has 45 calendar days from the date the notice is delivered from Nasdaq to provide to Nasdaq a compliance plan with the $2.5 million stockholders’ equity threshold. Acceptance of the plan is at Nasdaq’s discretion.
If the company’s plan is accepted, Nasdaq will grant the company an extension of up to 180 calendar days from the date the Company received the notice of deficiency. However, if the company does not regain compliance within the allotted timeframe, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that company’s securities listed on Nasdaq will be subject to delisting. The company would then be entitled to request review of that determination by a Nasdaq hearings panel.
The memo explains that while the stockholders’ equity standard is only one of three alternatives for complying with Rule 5550(b), pre-revenue and newly commercialized life sciences companies have had a harder time relying on the market value standard as of late, and the net income standard is typically also unavailable. So, the stockholders’ equity standard has become more important.
The memo goes on to provide a template for a successful compliance plan. Make sure to check that out, along with the other resources in our “Delistings” Practice Area.
Now that we’ve gotten the scary prospect of delisting out of the way, let’s turn to what you need to do to get (and stay) in compliance with the governance standards of your exchange.
One of my “go to” resources for quickly referencing independence and other requirements applicable to public company directors has long been Weil’s chart on those requirements. I was pleased to learn that the firm recently issued an updated version of that chart, which we’ve posted in our “IPOs” Practice Area. Check it out – it covers NYSE & Nasdaq listing standards for boards and committees, as well as SEC disclosure requirements relating to directors.
As you prepare your governance calendar for the upcoming year, this 7-page Sullivan & Cromwell memo can help you consider topics that may get airtime in the boardroom in 2025. The memo is organized into separate sections for the board and each of the key committees. Keep in mind that “who does what” can vary from company to company, so always remember to check your own charters.
Here are 6 topics that S&C predicts many companies will be covering at the full-board level – see the memo for more color on each of these:
1. Addressing the use of artificial intelligence
2. Overseeing management succession planning
3. Monitoring the company’s compliance culture
4. Improving committee coordination
5. Monitoring the business impact of emerging trends (political, regulatory, economic, and social)
6. Reviewing cyber incident response plans and disclosures
Just earlier this month, John was recounting the recent oral argument before the Supreme Court in the case of Facebook, Inc. v. Amalgamated Bank, which addresses the potential liability in the hypothetical risk factor scenario that we have all been grappling with as securities lawyers for a number of years. As John noted, some of the conservative justices seemed skeptical of the arguments that hypothetical risk factor disclosure was misleading, with at least one justice noting that the SEC could write a rule to address this type of disclosure, rather than forcing the judiciary to “walk the plank.” Don’t even get us started…
While we all might have hoped for some clarity around this issue through an authoritative Supreme Court opinion, no such clarity is meant to be, because the Supreme Court pulled an Emily Litella last week and issued an order stating: “Nevermind!” This BCLP alert notes:
The Court on November 22 issued an order in Facebook, Inc. v. Amalgamated Bank, No. 23-980, stating that the “writ of certiorari is dismissed as improvidently granted.” That’s the language the Court uses when it accepts a case for consideration and then changes its mind about deciding the case.
As a result, the Supreme Court leaves standing the Ninth Circuit’s decision that allowed the plaintiffs to proceed with their complaint based on allegedly misleading hypothetical cybersecurity and data privacy risk factor disclosure that did not address the Cambridge Analytica scandal.
For now, in the absence of any further clarity, companies should continue to be vigilant about these disclosures, given the potential risks from an SEC enforcement and private securities litigation perspective.
SEC Rule 15c2-11 governs when dealers are permitted to publish quotations for securities. Way back in September 2020, the SEC amended the rule to prohibit dealers from publishing quotes when current information about the issuer is not publicly available. In 2021, the Staff clarified its position that Rule 15c2-11 applies to fixed income securities and provided some limited relief for privately issued fixed income securities, which was ultimately extended to January 4, 2025.
As the Mayer Brown Free Writings & Perspectivesblog notes, last Friday the Staff issued yet another no-action letter on the topic:
Broker-dealers had been preparing for the sunset of the prior time-based relief that the staff of the Securities and Exchange Commission provided in respect of compliance with Rule 15c2-11 as to certain fixed income securities, which expires on January 4, 2025. The SEC had separately provided exemptive relief with respect to Rule 144A securities; however, this still left broker-dealers with burdensome requirements to address for other fixed income securities. Now, the staff of the SEC has provided further relief in a no-action letter that was issued just yesterday for fixed income securities, which allows broker-dealers to continue to provide quotes to the extent that either the issuer or the fixed income securities meet one of seven specified criteria. Among others, relief is available for asset-backed securities, securities of an issuer that files call reports with a banking agency, and securities of an issuer that is an SEC-reporting company.
It should be noted that, back in October 2023, the SEC issued an order granting broker-dealers exemptive relief from Rule 15c2-11 for fixed-income securities sold in compliance with the Rule 144A.
For some reason, I always seem to be blogging around a holiday, so I can hardly resist the urge to write some sort of holiday-themed blog. While I must admit that I love Thanksgiving (or at least the concept of Thanksgiving, if not the actual execution), this year’s holiday will no doubt be bittersweet, as it is the first holiday that we celebrate as a family after my father passed away over the summer. But he would have wanted us to go on with the celebration, because he loved Thanksgiving too (or at least the concept of Thanksgiving), and I certainly have lots of fond memories of many enjoyable Thanksgivings with him over the years.
As I did at this time last year, I would like to reflect on some of the things that we all have to be thankful for tomorrow in the securities and governance world:
1. We made it through the election year. I don’t know about you, but I yearn for the days when elections were boring. Can someone please run for office on a platform of bringing back boring elections? I felt like the collective stress during this year’s election cycle was palpable – and who needs all of that added stress? In any event, in the finest of Thanksgiving traditions, I will keep my remarks largely apolitical so as not to stir up a “spirited” conversation or all-out food fight. By all accounts, the upcoming change in leadership at the SEC will mean an end to the avalanche of rulemaking that we have faced over the past few years, which has resulted in quite a few new requirements for public companies. While we may ultimately see an avalanche of SEC rulemaking going the other way and rolling back requirements, at least that scenario is generally easier to deal with than complying with new disclosure and governance requirements.
2. The SEC is (almost) done with Dodd-Frank. Sometimes I really feel like I worked at the SEC in a whole different era, because when I was on the Staff you were generally told that rulemakings mandated by Congress were a priority and needed to be addressed with all due speed. Nowadays, the agency seems to not feel any such urgency, as it took over a dozen years to implement that Dodd-Frank Act disclosure and governance provisions that apply to public companies. Admittedly, some of the delays were not always within the SEC’s control, but a dozen years is a long time! In 2024, we saw the first disclosures about the exchange-mandated clawback policies, as well as the first Form SD filings by resource extraction issuers. We endured yet another season of pay-versus-performance disclosure, which I can only hope will be ripe for revisiting by the SEC’s new leadership. Unbelievably, the SEC still has not adopted the incentive-based compensation rules for financial institutions contemplated by Section 956 of the Dodd-Frank Act, although the SEC joined some of the other financial institutions regulators in a re-proposal earlier this year.
3. You will not be working on SEC-mandated climate disclosure over the holidays.The SEC adopted its much-anticipated climate disclosure requirements in March of this year (why does that seem so long ago?) and the largest filers would have had to start working on disclosure controls to provide disclosures for the upcoming 2025 fiscal year. The rules remain mired in litigation and it certainly looks like the rules will have no future in the Trump Administration. So let’s go “pencils down” and enjoy the holiday – but don’t forget about CSRD.
4. We have one year of cybersecurity disclosure under our belt. At this time last year we were wringing our hands over what we were going to say in response to the SEC’s new cybersecurity disclosure rules, but we were able to get through the first Form 10-K cycle largely unscathed. I do think that we will see some iteration on the annual cybersecurity disclosure during this upcoming annual reporting season, as companies revisit their approach in light of what they have observed from their peers’ disclosures and broader disclosure trends. It is also important for companies to consider what changes may be necessary to the disclosure in light of rapidly evolving cybersecurity conditions and governance changes that can lead to different disclosures from year to year.
5. We Got Together In-Person at the October Conferences! I am particularly thankful for the opportunity to see so many members of our community in person at the October Conferences in San Francisco. It was so nice to be freed from the confines of the Zoom screen! Let’s keep it up.
I am planning to enjoy the next few days of holiday downtime and I hope you can too. I wish you a happy Thanksgiving!
