The Society for Corporate Governance & EY recently issued a report addressing the evolution of Disclosure Committees. The report updates their 2021 report, and this excerpt from the press release announcing the issuance of the report highlights some of the key findings:
– 60% of disclosure committees now regularly review cybersecurity risk and governance disclosures and nearly 40% now regularly review human capital disclosures, up from 32% and 13%, respectively, in our 2021 survey, likely reflecting increasing regulatory and stakeholder scrutiny and expectations.
– Nontraditional roles, such as the heads of Risk, Human Resources, and Information Security, are increasingly among the regular members of companies’ disclosure committees.
– Nearly half of respondents involve their disclosure committees in determining whether cyber incidents are material and require Form 8-K disclosure, while the balance look to another individual or group of individuals to make that determination.
This Bloomberg Law article reports that following the SCOTUS’s elimination of Chevron deference, GOP senators are redoubling their efforts to deep six the “Deep State.” This excerpt says that step one has been to bombard agencies with inquiries about how the decision will impact their work:
GOP lawmakers cheered the Loper Bright Enterprises v. Raimondo decision, arguing it will result in fewer burdensome regulations and give Congress more say in how laws are carried out. Their initial response to the ruling has been to overwhelm agencies with inquiries on the ruling’s impact on their day-to-day work.
To prepare for long-term change, 19 GOP senators last month formed a working group to examine how Congress should limit agency power and roll back regulations underpinned by Chevron. The senators themselves haven’t met as a group, but GOP staff from members’ offices and the Judiciary Committee are organizing subgroups and written to over 100 agencies, quizzing them on the decision’s impact in their ongoing rulemaking, civil enforcement actions, and adjudications.
The article says that Republican senators plan to propose more than a dozen bills targeting agency rulemaking, including legislation that would create a “separate regulatory office on Capitol Hill and expanding the statutory exceptions to the filibuster for agency rules.”
Yesterday, the SEC announced settled enforcement proceedings against Carl Icahn and Icahn Enterprises arising out of alleged failures to comply with disclosure requirements in Schedule 13D and Form 10-K applicable to pledging arrangements. Here’s an excerpt from the SEC’s press release:
According to the SEC’s orders, from at least December 31, 2018, through the present, Icahn, who is IEP’s controlling shareholder and Chairman of the board of directors of IEP’s general partner, pledged approximately 51 to 82 percent of IEP’s outstanding securities as collateral to secure personal margin loans worth billions of dollars under agreements with various lenders.
Notwithstanding Icahn’s various margin loan agreements and amendments, IEP failed to disclose Icahn’s pledges of IEP securities as required in its Form 10K until February 25, 2022. Icahn also failed to file amendments to Schedule 13D describing his personal margin loan agreements and amendments, which dated back to at least 2005, and failed to attach required guaranty agreements. Icahn’s failure to file the required amendments to Schedule 13D persisted until at least July 9, 2023.
Without admitting or denying the SEC’s findings, Icahn consented to an order to cease and desist from future violations of Section 13(d)(2) of the Exchange Act and Rule 13d-2(a) thereunder. He also agreed to pay a $500,000 civil money penalty. Icahn Enterprises also consented, on a neither admit nor deny basis, to an order to cease and desist from future violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. The company also agreed to pay a $1.5 million civil money penalty.
Since this involves Carl Icahn, the SEC’s enforcement action has already garnered quite a bit of media attention. If you’re interested in more background on the SEC’s investigation, check out this Reuters’ article.
Last week’s departure of Chipotle CEO Brian Niccol to assume the CEO role at Starbucks is a high-profile example of how CEO transitions can come at you fast. It also illustrates the need for corporate succession plans to address the possibility of unexpected transitions. Meridian Compensation Partners recently published an article outlining its views on the three keys to successful CEO transition planning. This excerpt discusses the unexpected resignation scenario and the key components that should be incorporated into a succession plan to address it:
Resignation (or Medical Emergency): This scenario often comes with little warning. This is the area where the company’s emergency succession plan should come into effect immediately. This plan should address:
― Communication: Appropriate internal and external messaging.
― Interim CEO: Appointment of interim leadership (sometimes a qualified board member, an executive who can be a steady hand during a CEO search, but who does not aspire to the CEO role and in those rare ideal cases, an internal, ready now candidate).
― Open Incentive Cycles: Treatment of open cycles can be impacted by the circumstances that gave rise to the resignation balancing formal provisions with judgments around whether conservatism or magnanimity are best suited.
― Search Process: This should be based on both pre-existing internal candidates’ development plans and an “evergreen” list of external candidates.
The article also points out the need to address the retention risk among disappointed CEO candidates associated with selecting a new CEO through an internal promotion or an external hire, as well as the need for boards to understand market compensation and other key employment terms in advance of an external search or an internal promotion.
I’m excited to announce the launch of “Understanding Activism with John & J.T.” – a new podcast series available to members of TheCorporateCounsel.net and DealLawyers.com. Orrick’s J.T. Ho will be my co-host for these podcasts. Together with our guests, we’ll focus on key issues in shareholder activism and seek out insights from both the activist and management perspectives.
Our inaugural podcast features a discussion with Kyle Pinder of Morris Nichols on recent activist challenges to advance notice bylaws and the implications of the Delaware Supreme Court’s decision in Kellner v. AIM Immunotech. Check it out & stay tuned for future podcasts in the series!
I was sorry to see that Peter Marshall passed away last week at the ripe old age of 98. To me, he was sort of an avatar of the “Zoom Age”, since that now indispensable remote communications tool is basically an online version of his 1970s “Hollywood Squares” with all the fun removed. Speaking of Zoom, in this month’s issue of The Boardroom Insider, Ralph Ward offers some tips on how to improve online board sessions. Here’s an excerpt with a few of his suggestions:
– Online meeting platforms and board portals have been steadily adding to their suite of tech tools, and smart boards are making use of them for improved governance. The use of visuals in meetings opens up fresh ideas to communicate better. Example – most platforms allow real-time annotation and editing of documents… but are you fully using this? Consider the long-time headache of a board resolution that gets turned inside-out during discussion. Rather than a later surprise (or the secretary having to call a point of order) how about revising the text onscreen during discussion?
– Here’s another clever way meeting and reading can be combined with online gizmos. Everyone on the call has different audio tech, which means miking and speaker volume may not be the best. Also, as we’ve gently noted in the past, some older board members might not be hearing as well as they once did. Zoom and most other video meeting platforms offer real-time captioning of what’s being said. OK, the transcript may not be perfect — but how handy would it be to watch directors’ words at the bottom of the screen while they speak?
– Boards are experimenting with other online visual tools and aids as well. Too often, sharing of visuals has been one-way… look at this boardroom presentation or white board everybody. But remote members can also use screen sharing at their end to show items or info on their screens, or to draw or annotate on what’s being displayed (no doodling funny moustaches on a speaker, please).
Lots of good ideas in here, although in the spirit of bringing the Zoom experience closer to the Hollywood Squares experience, I respectfully dissent from Ralph’s “no doodling funny mustaches on a speaker” recommendation.
– A total of 112 new federal securities class action suits were filed in the first half of 2024. The bulk of these (106 cases) were standard cases containing alleged violations of Rule 10b-5, Section 11, and/or Section 12. If this pace continues, 2024 will see approximately 224 cases, roughly in line with 2023 levels.
– The electronic technology and technology services and the health technology and services sectors accounted for 54% of filings. However, suits in the finance sector declined by more than one-third to 11%.
– The most active jurisdictions were the Second and Ninth Circuits, which together accounted for approximately 60% of filings.
– A significant number of standard case filings included allegations related to missed earnings guidance (38%) and allegations related to misled future performance (32%). Cases with allegations related to accounting issues declined to 12%.
– AI-related suits have increased, while crypto- and SPAC-related filings have continued to decline.
– The first half of 2024 saw 100 cases resolved, split between 52 dismissals and 48 settlements. If this rate continues, the number of resolved cases in 2024 would exceed the 190 seen in 2023.
– Excluding settlements of $1 billion or more, average settlement values saw a decline by approximately 25% in 2024 H1 from 2023 to $26 million. Similarly, the median settlement value declined by 40% to $9 million.
Over on “The D&O Diary” blog, Kevin LaCroix has posted a deep dive on the NERA report. This excerpt notes that the aggregate value of settlements projects to a lower total than last year, but also points out some big-ticket settlements that may be finalized during the second half of 2024:
The aggregate settlement amount for the first six months of 2024 was $1.2 billion, which projects to a year-end total well below the inflation adjusted aggregate total of $4.0 billion for the full year 2023. However, the report notes that there are several large previously announced pending settlements for which settlement-approval hearings are scheduled in the second half of 2024, including Under Armour ($434 million), Alphabet ($350 million), Zoom Video Communications ($150 million), and Perrigo Company plc ($97 million). The report comments that “the aggregate settlement value in the second half of 2024 would be expected to exceed the $1.2 billion seen in the first half of 2024.”
We’ve posted the transcript for the recent DealLawyers.com webcast – “2024 DGCL Amendments: Implications & Unanswered Questions.” Our panelists – Hunton Andrews Kurth’s Steven Haas, Gibson Dunn’s Julia Lapitskaya & Morris Nichols’ Eric Klinger-Wilensky – provided their insights into this year’s controversial DGCL amendments. Topics addressed included the amendments’ implications for governance and acquisition agreements, the interplay between fiduciary duties and contractual obligations, and unanswered questions resulting from the amendments.
Here’s a snippet from Steve Haas’s thoughts on how the ability to include provisions for lost premium damages in merger may influence the drafting of specific performance language:
“Next drafting point, the final one under this ConEd, or Crispo category, is the issue of specific performance. Surely parties will continue to prefer specific performance as a remedy in a busted deal over monetary damages. The synopsis says that the statute is not intended to exclude any remedies that are otherwise available. With that said, merger agreements may want to expressly say that notwithstanding the company does have the right to seek loss premium damages, the parties still agree that monetary damages will be inadequate, and that the parties are entitled to seek specific performance. Maybe that’s a drafting nuance, but I wouldn’t be surprised to see more agreements acknowledge the damages section, but still saying very specifically that the parties are agreeing that specific performance is the chosen remedy.”
Members of DealLawyers.com can access the transcript of this program. If you are not a member of DealLawyers.com, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
When we last checked in on the litigation over the SEC’s climate disclosure rule, the SEC had indicated that, if the rule survives litigation, it would provide a new implementation period for companies to come into compliance. Now things are heating up on the docket, with both sides submitting their briefs (along with many “intervenors”). Based on the calendar, most briefs should be in by now, with the petitioners’ response due mid-September.
This blog from Cooley’s Cydney Posner recaps the SEC’s key arguments in support of its authority to adopt the rule. Here’s an excerpt:
The SEC maintains that its “approach to climate-related information has been consistent with its longstanding interpretation of its statutory authority: the Securities Act and the Exchange Act authorize the Commission to mandate disclosures that protect investors by facilitating informed investment and voting decisions.” Each disclosure requirement in the rules is designed to elicit information with that goal and is therefore “necessary or appropriate in the public interest or for the protection of investors.” For example, the requirements to disclose Scope 1 and Scope 2 GHG emissions are a central measure of exposure to transition risk, one of the business and financial risks facing companies. Consequently, the SEC argues, the information is elicited is “necessary or appropriate in the public interest or for the protection of investors” and within the SEC’s authority.
Petitioners’ arguments, the SEC contends, set up a “strawman—challenging reimagined rules that the Commission did not enact and criticizing a rationale that the Commission expressly disclaimed.” Contrary to petitioners’ arguments, the rules were adopted “to advance traditional securities-law objectives of facilitating informed investment and voting decisions,” not to “influence companies’ approaches to climate-related risks or to protect the environment.” As reflected in the extensive factual record, the rules respond to “changed facts, including subsequent market and regulatory developments,” such as the current importance of climate-related risk information to investor decision-making and investor interest in detailed, consistent and comparable information. In adopting the rules, the SEC emphasized that they “do not ‘determine national environmental policy or dictate corporate policy,’” and emphasized that it “is ‘agnostic as to whether and how issuers manage climate-related risks so long as they appropriately inform investors of material risks.’” In addition, the rules “do not ‘prescribe any particular tools, strategies, or practices with respect to climate-related risk.’”
The blog also summarizes the Commission’s response to challenges under the Administrative Procedure Act and the First Amendment. As I mentioned, there are a lot of amicus briefs on both sides – here is one from 17 First Amendment scholars that defends the rule. Here’s a summary of their arguments:
The Knight Institute’s amicus brief, filed in support of the rule, makes four arguments. First, securities disclosure requirements that inform and protect investors do not ordinarily raise First Amendment concerns. Second, the climate disclosure rule falls within this longstanding tradition of securities disclosure requirements. Third, at most, the rule should be evaluated under the framework that the Supreme Court established in Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio, 471 U.S. 626 (1985). Finally, the rule survives Zauderer’s scrutiny.
It’s anyone’s guess what will happen to this rule, but there’s a chance that the court’s decision will be a mixed bag. The SEC acknowledges that possibility in its brief. Cydney notes:
While the SEC urged the court to agree with its conclusions that all of petitioners’ challenges fail, if the court were to determine otherwise, the SEC requests the court to remand, not vacate, and to sever any provision that the court determines to be unlawful.
In a decisive move that it previewed earlier this year, the California State Teachers’ Retirement System recently announced that it voted against the boards of directors at a record 2,258 companies this past proxy season – which is up from a then-record of 2,035 companies in 2023. This is out of about 10,000 meetings globally.
Although many companies have paused (or at least not accelerated) efforts on climate disclosure while we wait out litigation over the SEC’s rule, CalSTRS’ voting policies continue to matter because it is one of the largest pension funds in the world, with over $341 billion in assets. The pension fund articulates its expectations as follows:
CalSTRS expects all portfolio companies to accomplish the following, to help effectively manage the risks and opportunities associated with climate change:
– Publish a report on sustainability-related disclosures that aligns with the International Financial Reporting Standards, which took over the monitoring of companies’ progress on climate-related disclosures from the Task Force on Climate-related Financial Disclosure (TCFD).
– Disclose Scope 1 and Scope 2 greenhouse gas (GHG) emissions. Scope 1 emissions come from a company’s operations and Scope 2 emissions are from the generation of power a company uses.
In addition to the above disclosures, CalSTRS expects the highest global emitting companies on the Climate Action 100+ focus list and other high-emitting companies to also set appropriate targets to reduce GHG emissions, as this is an important step to reach a net zero portfolio by 2050 or sooner.
The press release says there has been improvement in methane emissions reporting over the past year, and that 10 companies have joined the Oil and Gas Methane Partnership 2.0 (OGMP 2.0), a United Nations-led framework committed to the measurement, reporting and mitigation of methane emissions, as a result of CalSTRS-led engagements.
