The Financial Timesrecently reported that the SEC is likely to see an exodus of experienced lawyers over the next few months in anticipation of the Trump administration’s expected budget & headcount cuts across a range of federal agencies. According to a recent LegalDive.com article, some of the leading players in the crypto industry want to make sure their law firms know that they’ll pay a price if they hire any of the SEC lawyers involved in enforcement actions targeting crypto companies:
Crypto companies are threatening to wage a war of retribution against law firms if they hire lawyers from the outgoing Biden administration who played a role in trying to rein in their industry through enforcement actions.
The CEO of Coinbase and CLO of Ripple have used social media posts to take a critical look at lawyers leaving the Securities and Exchange Commission and other federal agencies that worked on lawsuits against their industry.
“We’ve let all the law firms we work with know, that if they hire anyone who committed these bad deeds in the (soon to be) prior administration, we will no longer be a client of theirs,” Brian Armstrong, CEO of Coinbase, the largest crypto exchange in the United States, said in a December 1 X post.
What a great idea! Yes, an industry-wide vendetta against former regulators is definitely the best way to ensure the kind of good working relationship with current regulators that crypto leaders will need to achieve a comprehensive system of rules that the industry can live with. As undeniably brilliant as this cutting off your nose to spite your face strategy is, however, it looks like the crypto folks might be better served in the short term to worry about the SEC lawyers who are staying behind, instead of the ones who are leaving.
Join us tomorrow for the webcast – “Capital Markets: The Latest Developments” – to hear White & Case’s Maia Gez, Mayer Brown’s Anna Pinedo, Cooley’s Richard Segal and Gunderson’s Andrew Thorpe review the current state of the capital markets, financing alternatives, IPO readiness and recent developments impacting public offerings.
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Over the weekend, former Chief of the SEC’s Office of Internet Enforcement John Reed Stark posted an in-depth article on X in which he discussed some reforms he expects to see the SEC initiate in the early days of Paul Atkins’ leadership. Stark worked the SEC during Atkins’ last tour of duty and believes he’s an excellent choice to serve as SEC Chair. Based on his experience with Atkins and knowledge of his views, Stark said that he expects to see an “extraordinary, monumental, and urgently required transformation within the SEC, especially within the SEC Division of Enforcement.” Here are some of the specifics:
– “Open Jacket” Disclosure Policy in Enforcement Actions. Unlike federal prosecutors, the SEC doesn’t have a policy requiring it to lay its evidentiary cards on the table before instituting enforcement proceedings. During his time as a commissioner, Stark says that Atkins believed that “failing to share critical incriminating — and most importantly, exculpatory — evidence, violated the rights of U.S. citizens and also inhibited the ability of enforcement staff members to candidly explain an investigation to the SEC Commissioners.” He said he expects Atkins to order Enforcement to fully inform potential defendants about the allegations and the SEC’s evidence before entering into settlement discussions.
– Backing off Cyber Enforcement & Repealing the Cyber Disclosure Rule. Stark expects that Chair Atkins will put the brakes on the SEC’s cyber disclosure enforcement actions targeting companies that have experienced “good faith mishaps that had no real-world consequences” and to instead focus on cyber-related disclosure fraud. He also expects that Atkins will either ask his fellow commissioners to repeal the cyber disclosure rule or freeze its implementation pending further study.
– Deemphasizing Corporate Penalties & Emphasizing Individual Accountability. Stark believes that Chair Atkins is particularly concerned that the corporate managers might agree to a large corporate penalty in order to avoid or reduce sanctions against individual wrongdoers. Stark contends that Atkins thinks this creates a perverse incentive that results in shareholders footing the bill for individual misconduct. He also says that Atkins is concerned that the potential for significant corporate penalties may result in a misallocation of resources by incentivizing the Enforcement Division to chase potential headline grabbing corporate penalties.
The article addresses a number of other potential reforms, including cracking down on what Atkins considers to be the “tyranny of the minority” inherent in the shareholder proposal system, eliminating crypto enforcement, and reducing even further the SEC’s efforts to target ESG-related disclosure shortcomings.
Oh yeah, and one more thing – although Stark didn’t mention this one directly, other media reports continue to indicate that the climate disclosure rule is likely an “ex-parrot.”
In a recent blog, Gunster’s Bob Lamm argues that whatever concerns some of us may have about Donald Trump’s return to the White House, the changes at the SEC will likely make the agency easier to work with for public companies and their legal counsel:
Let’s face it – the SEC under Chair Gary Gensler has been difficult. I will try to take the high road by simply saying that under his leadership the SEC has been dismissive if not downright scornful of the issuer community when it comes to both rulemaking and enforcement.
There are many examples on the rulemaking side, but my favorite (so to speak) was the decision to require quarterly disclosure of corporate stock buybacks on each day during the preceding quarter. Perhaps we were supposed to be grateful that the original proposal – to file reports of each day’s buyback activity – was dropped in favor of the quarterly disclosure requirement. However, from my perspective there was no rational purpose to that disclosure, with the possible exception of giving academics the ability to conjure up correlations between buyback activity and other “nefarious” activities by corporations and their executives and directors. Fortunately, the final rules were thrown out by the federal courts.
Bob’s aside about academics being the only beneficiaries of the SEC’s buyback rules struck a chord with me. It seems to me that SEC rulemaking over the past several years has been unduly deferential to input from academics. To me, the best example of this is the Rule 10b5-1 amendments, which I’ve previously argued mostly represent a solution in search of a problem.
In contrast to the SEC’s deference to academics, Bob says that the agency has given public companies the cold shoulder. For example, he notes the SEC’s refusal to consider an “Issuer Advisory Committee” akin to its Investor Advisory Committee), as well as its reversal of the proxy adviser regulations adopted during the first Trump administration. He also points to the agency’s ham-fisted approach to the adoption of the climate disclosure rule, and its endless pursuit of disclosure controls & procedures enforcement cases against public companies.
Bob’s hope that Trump 2.0 will lead to better relations between public companies and their principal regulator is premised on his view that things weren’t so bad for public companies at the SEC the last time around. That’s probably true, but he acknowledges that the bottom line is that there are no guarantees, and like everything else about Trump 2.0, we’ll just have to wait and see what the next few years bring.
During his first tour of duty as an SEC commissioner, Paul Atkins was not known for his warm and fuzzy feelings toward the PCOAB. Now, as he prepares to assume the position of SEC Chair, it looks like critics of the agency are likely to have his ear, and the implications for the PCAOB could be significant. Here’s an excerpt from a recent Wall Street Journal article:
New leadership likely would scale back the PCAOB’s reach, leading to fewer penalties, slower rule making and a smaller budget, PCAOB observers say. A long-gestating debate over whether the SEC should absorb the PCAOB is poised to resurface, they say.
Atkins, while an SEC commissioner, criticized the PCAOB’s budget, saying salaries paid to board members were disproportionately high. In speeches, he spoke out against rules that limited audit firms’ ability to make professional judgments. “Overly prescriptive standards can rob you of the ability to apply your professional judgment,” Atkins said in 2005.
The board members’ annual salaries have been flat since 2009, with the chair receiving nearly $673,000 and the other members receiving almost $547,000.
Atkins as commissioner showed disdain for the PCAOB when meeting with officials from the audit regulator, said Martin Baumann, an adjunct accounting professor at Southern New Hampshire University and former PCAOB chief auditor. “I don’t expect this to be good for the PCAOB,” he said, referring to Trump’s Atkins pick.
The possibility that the PCAOB may ultimately be on the chopping block shouldn’t come as a surprise. Eliminating the PCAOB was one of the securities regulation reforms specifically called out in the Project 2025 document I blogged about last month. However, that kind of a move would require Congress to act, since the PCAOB was created by Sarbanes-Oxley.
On the other hand, despite her recent appointment to a second term, PCAOB Chair Erica Williams might want to dust off her resume. The WSJ article suggests that she may be replaced, and it wouldn’t be the first time that the SEC has cleaned house at the PCAOB after a change in administrations. Also, I’m guessing that it’s not a good sign that Google is already identifying her as the “former chairperson” of the PCAOB.
The CAQ and Ideagen Audit Analytics recently issued the 2024 edition of their “Audit Committee Transparency Barometer,” which assesses audit committee trends and disclosure practices. The report says that cybersecurity oversight will be a high priority issue for audit committees during the upcoming year, and that disclosures about cyber oversight are expected to become more robust. Here’s an excerpt:
The cybersecurity landscape has changed dramatically in recent years. Cybersecurity incidents are on the rise and the costs associated with a cybersecurity incident are also increasing. In the CAQ and Deloitte joint Audit Committee Practices Report, 69% of audit committee respondents indicated that cybersecurity will be in the top three priority areas for the audit committee in the next 12 months, and 30% ranked cybersecurity as the number one priority for the audit committee in that period.
Additionally, with the SEC Cybersecurity Disclosure Rule in full effect, certain cybersecurity information is required to be included in SEC filings. Further, per the CAQ 2024 Audit Partner Pulse Survey, 47% of audit partners expect to see companies in their primary industry sector voluntarily increasing or enhancing cybersecurity disclosures over the next 12 months.
The report says that consistent with this expectation, more boards are disclosing that they have a cybersecurity expert (60% of the S&P 500 in 2024, compared to 51% in 2023). It also says that in today’s complex & evolving threat environment, boards and audit committees need to stay current through education and training in order to effectively oversee corporate cyber risk management efforts.
The report also addresses disclosure practices with respect to director skills, auditor oversight and tenure, the relationship between audit fees and audit quality, and board oversight of ESG issues.
FEI’s Q4 “Activism Vulnerability Report” highlights recent activism trends and notable activist campaigns. Here are some of the key takeaways:
– Activist investor activity experienced a seasonal dip after a very active first half of 2024. This trend aligns with typical patterns. There were 56 campaigns initiated in 3Q24, closely mirroring previous years’ activity levels for the same period.
– Board seats gained by activists in U.S. companies through September 30, 2024, remained relatively steady compared to the same period in 2023. However, the pathways to these seats shifted, with fewer board seats achieved through settlements and a slight uptick in board seats won through proxy contests.
– Activists publicly sought one or more board seats 147 times during the first three quarters of 2024, up from 112 at the same point last year. However, their success rate declined, with only 53% of these demands resulting in board seats, down from 63% in the same period last year.
– Mid-cap companies, in particular, have seen a surge in activist interest, accounting for 25% of total campaigns in 3Q24, compared to just 10% a year earlier. This shift is not without reason: year-to-date through November 1, activists are achieving higher success rates in the mid-cap segment, with an impressive 74% of concluded mid-cap campaigns delivering favorable outcomes for activists in 2024, up from 51% during the same period last year.
– Through 3Q24, there have been 40 campaigns with explicit demands for M&A transactions, compared to 34 during the same period last year. This persistent and increased focus on M&A may reflect activists’ interest in capitalizing on improving conditions in the current economic environment, particularly as interest rates have begun to decline and future rate paths become more predictable.
The report says that the most frequently targeted sectors during the third quarter were TMT, with 14 campaigns, followed by Financial Institutions, with eight, and that these same sectors are continuing to face activist pressure in the current quarter, with nine new campaigns in TMT and six in Financial Institutions launched between October 1 and November 1, 2024.
Speaking of activism, we’ve posted our latest “Understanding Activism with John & J.T.” podcast. This time, J.T. Ho and I were joined by Kai Liekefett, who co-chairs Sidley’s Shareholder Activism and Corporate Defense practice. Kai’s practice focuses exclusively on shareholder activism campaigns, proxy fights and hostile takeovers, and over the past five years, he’s defended over 150 proxy contests globally and approximately 25% of all U.S. late-stage proxy fights, more than any other defense attorney in the world.
Topics covered during this 26-minute podcast include:
– Why many activists supported Donald Trump over Kamala Harris
– What changes to the SEC’s approach to proxy advisor regulation, UPC, and Rule 14a-8 might mean for activism
– Implications of potential changes in the antitrust merger review and enforcement environment
– Impact of disruptions resulting from tariffs and other unconventional economic policies
– Potential changes in companies targeted for activism and activist tactics
Note that during the podcast, Kai comments on the implications of a new SEC chair on the agency’s approach to activism. We recorded this podcast on November 22, 2024, prior to President-Elect Trump’s appointment of Paul Atkins to serve in that capacity.
Our 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. We’re continuing to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!
Here’s something that Meredith blogged a couple days ago on CompensationStandards.com: You probably saw this week’s Wall Street Journal article on the Delaware Chancery’s latest decision related to Elon Musk’s 2018 Tesla pay package. There are very few takeaways for executive compensation professionals in the decision, but it seems worthy of addressing here — even if only for its novelty. So, keeping with the theme of my April post on Tesla’s proxy filing — including the proposal requesting that stockholders ratify said pay package after the Chancery Court ordered it rescinded — here are five things to know about the latest decision:
– This opinion was still at the Chancery Court level — penned by Chancellor McCormick, who was also responsible for the initial post-trial decision ordering rescission of the award. The order addressed the defendants’ motion to “revise” the post-trial opinion based on the stockholder vote and plaintiff attorneys’ petition for fees and expenses.
– Chancellor McCormick used this opportunity to clarify/emphasize a few points from the initial post-trial opinion. Specifically, that the decision did not hold that the Tesla board should have paid Musk nothing. She says, “there were undoubtedly a range of healthy amounts that the Board could have decided to pay Musk. Instead, the Board capitulated to Musk’s terms and then failed to prove that those terms were entirely fair.” She also clarified that none of the legal theories applied in the opinion were novel — if anything was novel in the opinion, it was simply that those legal principles had not previously been applied by the court to Musk vis-a-vis Tesla.
– The opinion considered events post-dating the initial post-trial decision, including the actions of the single-member special committee that was formed to assess the redomestication of Tesla to Texas and whether Musk’s 2018 award should be submitted to a second stockholder vote and the 2024 stockholder vote intended to “ratify” the award.
– Chancellor McCormick found that the “ratification” argument had four fatal defects — three expected, one surprising.
First, there are no procedural grounds for flipping the outcome of a post-trial decision based on evidence created after trial. Procedural rules allow the court to reopen the trial record for newly discovered evidence (“in existence at the time of trial”) but not newly created evidence. From a policy perspective, if this was allowed, “lawsuits would become interminable” and it would “eviscerate the deterrent effect of derivative suits.”
Second, as an affirmative defense, common-law ratification is waived if not timely raised. And, “wherever the outer boundary of non-prejudicial delay lies,” raising the defense “six years after this action was filed, one and a half years after trial, and five months after the Post-Trial Opinion” was too late.
Third, in a conflicted-controller transaction, the “maximum effect” of stockholder ratification is to shift the burden of proving entire fairness; it doesn’t shift the standard of review, which would require MFW’s additional protection of an independent committee and conditioning the transaction on the dual protections before negotiations. Defendants tried to argue that MFW was invoked after the post-trial opinion, to which the opinion says, “One does not ‘MFW‘ a vote, which is part of the MFW protections; one ‘MFW‘s a transaction.”
Finally, the proxy statement contained material misstatements. Tesla went to great lengths to avoid any argument that this second vote was not fully informed — having annexed 10 documents to the proxy, including the opinion and the special committee’s report to the board. But the legal impact of the stockholder ratification was unclear — and, trying to be transparent, the proxy said as much. That was a problem. “To be fully informed for ratification purposes, ‘the stockholders must be told specifically . . . what the binding effect of a favorable vote will be.’” Plus, the proxy used phrases like “extinguish claims,” “any wrongs … should be cured” and the disclosure deficiencies “corrected,” which were “materially false and misleading.”
– Using “sound” methodology, the plaintiff’s attorneys asked for $5.6 billion in freely tradeable Tesla shares as attorney fees. To this, the opinion says, “in a case about excessive compensation, that was a bold ask.” To avoid a windfall and reach a reasonable number, the opinion adopts the defendants’ approach of using the $2.3 billion grant date fair value to value the benefit achieved and applies 15% to that amount, resulting in a (still massive) fee award of $345 million.
As Dave noted last week, one thing that many of us are grateful for this holiday season is that we can take a big – and possibly permanent – pause from working to comply with the SEC’s climate disclosure rule that was adopted last spring. However, as Dave also pointed out, CSRD compliance will still require effort from many companies. On that front, Ropes & Gray recently updated its “transposition tracker” – which shows which EU member states have implemented CSRD requirements in their national laws.
A recent Teneo memo predicts that CSRD may even affect companies that aren’t subject to that disclosure regime, if institutional investors push for comparable disclosure across their portfolios. This consequence is included in the memo as one of the 10 most likely scenarios that could impact corporate environmental & social initiatives as the balance of power shifts in Washington. Here are 4 more possibilities that Teneo shares for 2025 & beyond:
– Greater scrutiny of company DEI programs. While the 2023 Supreme Court’s Students for Fair Admissions rulings focused on higher education, conservative campaigns to end corporate DEI programs have landed on company doorsteps this year. As a result, many companies have conducted legal reviews of their DEI programs and communications. New challenges to DEI initiatives are expected under the next administration, including the reinstatement of an executive order against “divisive topics” in DEI training for contractors and possible action from the Department of Labor to change federal policies. In addition to the risk of another shift in the legal landscape, the Trump administration is expected to appoint vocal critics of DEI, such as Elon Musk, Vivek Ramaswamy and Stephen Miller, to federal positions. Companies should prepare for the campaign against DEI to become more public and challenging as advocates, including employee groups, nonprofits and investors, press companies to stand firm with prior commitments.
– Revisited attacks on proxy advisory firms and ESG shareholder proposals. The SEC may resume its prior initiatives to rein in the perceived power of proxy advisory firms like ISS and Glass Lewis. Rules requiring proxy advisors to eliminate corporate advisory services and/or allow companies to review their reports ahead of official publication may also be revisited. ESG raters could also be affected by these initiatives. Other regulation that could limit the number of ESG shareholder proposals will likely be considered, such as higher minimum share ownership requirements for proponents and expanded grounds for companies to exclude ESG proposals. If shareholder powers become more limited, companies should expect proponents to adjust tactics, such as launching more “vote-no” campaigns against directors and/or Say on Pay votes, as well as single-issue proxy contests.
– Increasing importance of shareholder engagement. Investors will be eager to understand how these fundamental shifts will impact ESG and DEI programs within their portfolio companies. U.S. investors may have a very different perspective than European investors. With off-season shareholder engagement underway, companies should not deviate from the values expressed in their sustainability reports, as these statements are on-record, signed by the CEO and leadership of the company. As the new administration’s policies play out, companies can respond to changes by communicating them in proxies, ESG reports, websites, earnings calls and social channels.
– Fewer ESG mentions on earnings calls. Over the past year, companies have increasingly reevaluated their ESG communications strategies, especially during earnings calls. Under a Trump administration, there is expected to be less emphasis on sustainability and DEI-related policies. As regulatory pressures around ESG issues arise, companies may prioritize other financial and operational topics. The polarization of ESG may lead many companies to avoid further public discussion on contentious topics to steer clear of potential backlash. Going forward, earnings calls are expected to feature less ESG-related content, as they primarily focus on short-term performance and have limited time to address issues beyond financial metrics.
This memo is part of a series that Teneo has been running, which you may want to check out if you’re involved with your corporate sustainability disclosures:
Remember to visit PracticalESG.com for a deeper dive into how to implement initiatives and disclose ESG performance. We’re also continuing to post relevant resources in our “Sustainability” Practice Area on this site.
