As we know all too well, public companies these days are awash in policies and procedures. I think that is generally a good thing, because policies and procedures are critically important for ensuring that public companies comply with SEC and stock exchange requirements and a wide range of other important laws and regulations. One of the big risks of having so many policies and procedures is that sometimes policies may fall into the category of “set it and forget it,” which can create risks for the company and its directors and employees and could potentially defeat the whole purpose of having the policy in the first place.
One policy that unfortunately sometimes falls in to the “set it and forget it” category is the Regulation FD policy and broader policies around public disclosures and investor relations. A Regulation FD/investor relations policy is not specifically required by SEC rules or stock exchange listing standards, but these types of policies were nonetheless adopted en masse way back when Regulation FD was originally adopted in the Summer of 2000. Because the violative conduct contemplated by Regulation FD was different from what was addressed in insider trading policies, many companies felt compelled to adopt Regulation FD policies to provide clear guidelines and procedures for disclosing information in compliance with Regulation FD. The “set it and forget it” risk arises in that Regulation FD has not been substantively changed over the past 24 years, so companies have not had much prompting to go in and take another look at their Regulation FD policies.
Another consideration is the fact that Regulation FD is only part of the story when it comes to the policies and procedures that a company must implement with respect to its overall investor relations and public communications approach. For that reason, many companies have expanded their Regulation FD policies, or adopted separate policies, to address the full range of policies and expectations surrounding communications with the investment community, quiet periods, earnings releases and conference calls, guidance, review of analyst models and reports, dealing with leaks and rumors and the use of social media and other alternative communications channels. These policies and procedures that warrant a frequent review and refreshment, as methods of communication and market norms continue to evolve. To facilitate that review, here is my top ten list of items that should be considered:
1. Does your policy specify authorized spokespersons that can speak to the investment community on behalf of the company, and are the appropriate spokespersons listed? Are others speaking on behalf of the company in practice, but are not identified as authorized spokespersons?
2. Does your policy identify what information is considered “material nonpublic information,” and is that aligned with your insider trading policy?
3. Does your policy contemplate an obligation to immediately advise someone in the organization of any instances of potential intentional or non-intentional disclosure of material nonpublic information?
4. Is your Regulation FD policy aligned with other company policies addressing public disclosure and the communication of information to the general public and the investment community?
5. Do the company’s policies addressing investor relations matters (either as part of the Regulation FD policy or as a standalone policy) provide guidelines for earnings releases, earnings calls, pre-release situations, providing and updating guidance, participation in presentations and meetings and communicating with analysts (including the review of analyst models or reports) that are consistent with the company’s practices?
6. Should the company implement a “quiet period” prohibiting communications with the investment community around the time when earnings information for a quarter is known in order to minimize the risk of selective disclosure, or if the company has implemented a quiet period policy, is that period of time still appropriate?
7. Do the company’s policies addressing investor relations matters provide guidelines on how the company should respond to leaks and market rumors, generally with a “no comment” policy?
8. Do the company’s policies addressing investor relations matters specify a consistent approach for protecting forward-looking statements and complying with non-GAAP financial measure requirements?
9. Do the company’s policies addressing investor relations matters provide guidelines regarding the use of social media and other internet communications?
10. Do the company’s policies addressing investor relations matters prohibit sharing analyst reports and information from such reports to avoid the risk of adoption or entanglement?
For more information about these policies, check out our “Regulation FD” Practice Area. If you are not a member and do not have access to all of the practical resources found in our practice areas, sign up to be a member of TheCorporateCounsel.net today.
Governance professionals recognize that corporate governance is based on a mosaic of different inputs, which range from specific laws and rules to norms and best practices. In corporate governance land, it can sometimes feel like there is a lot of gray, rather than black and white requirements dictated by state law, the SEC and the stock exchanges.
In our “Q&A Forum” (#12,264), a member recently asked about the enforceability of provisions specified in a company’s corporate governance guidelines, which is a document familiar to many of us who practice with public companies. The member asked:
NASDAQ listed issuer (DE corporation) adopts corporate governance guidelines and includes a disclaimer regarding their purpose. If the guidelines include a section stating that directors either “shall” or “should” notify the board and receive board approval prior to taking on new directorships at outside public companies, what is the risk involved if a director doesn’t give prior notice or receive approval and accepts a directorship at another company without disclosing it to the board? Would this be a breach of duty of care of that particular director? Does the “must”, “shall” or “should” language make any difference in determining if there is a breach of the duty of care?
NASDAQ doesn’t require corporate governance guidelines, and neither does the SEC. The issuer has a code of ethics and conduct, as I understand it is required by the SEC, but the code doesn’t speak to this. The only other potential issue I see is with the state of incorporation’s corporation law. I don’t see anything regarding this in DE but would love more insight into that. The only thing I can think of would potentially be a breach of duty of care, but on the other hand, (a) accepting an outside directorship isn’t an action being taken by that director on behalf of the corporation or pursuant to the corporation’s governance and (b) it is my understanding that the corporate governance guidelines aren’t enforceable, whether or not the language is “shall” or “should”.
Am I missing something regarding Delaware law?
John responded:
The board has established a policy that it expects directors to follow. I don’t think a single incidence of noncompliance with that policy necessarily automatically results in a breach of the individual director’s fiduciary duty, but I think there are situations in which it could rise to such a level.
For example, if the director’s failure to comply with that policy resulting in the director accepting a seat on a board that would create an unlawful interlock, or if that director’s action also resulted in violation of an overboarding policy, or if the director’s failure to comply was willful, a plaintiff might have some fun with it. Remember, the director has accepted a position for which he or she will receive remuneration in violation of the policy, and I think a plaintiff who was inclined to bring a case might focus on that in an attempt to turn a care claim into a loyalty claim.
The other thing to keep in mind is that since this is a board policy, it implicates the entire board’s duty of oversight, and in an absolute worst-case scenario, might expose the other directors to a Caremark claim. This seems pretty far from rising to that level, but the takeaway is that if a board establishes a policy, it needs to be followed and violations of the policy appropriately sanctioned. The sanction doesn’t have to be draconian, but the board should address the violation in some fashion. Assuming there are no aggravating factors, perhaps requiring the director to undergo additional training on board policies and procedures might be appropriate.
I think this is a very timely question, because it seems to me that overboarding provisions of corporate governance guidelines are getting tested more and more these days, as public companies seek to refresh their board while the crop of qualified director candidates seems to remain in short supply. I increasingly find myself suggesting that companies periodically educate their boards about the corporate governance guidelines, so that directors are better attuned to the expectation that they provide timely notice of a potential new board position or executive role so that appropriate decisions can be made by the board and the individual director and embarrassment (or worse) can be avoided. I am afraid that corporate governance guidelines can drift into the category of policies that reside on the company’s website but are off the radar of those two whom the bulk of the provision apply – the members of the board of directors.
Summer is marching on and that means we have less than two weeks left before the early bird rate for our “2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences” expires on Friday, July 26th. As I have noted many times, we have put together an extraordinary group of speakers who will cover a wide range of timely topics over two full days of sessions on October 14th & 15th in San Francisco.
Our early bird in-person Single Attendee Price is $1,750, which is discounted from the regular $2,195 rate! If you can’t make it to the Conferences in person, we also offer a virtual option so you won’t miss out on the practical takeaways that our speakers will share, and we offer discounted rate options for groups of virtual attendees. You can register now by visiting our online store or by calling us at 800-737-1271.
On Friday, the SEC’s Small Business Capital Formation Advisory Committee released the agenda for its upcoming meeting on Tuesday, July 30, 2024, which will include “an exploration of recent changes to the U.S. Small Business Administration’s (SBA) Small Business Investment Company (SBIC) program.” This program will be open to the public via a webcast available on www.sec.gov.
At the meeting, the Committee will hear observations on the state of small business capital raising and discuss recent changes to the SBIC program designed to increase access and diversify funding for small businesses, start-ups, and fund managers. The SEC’s announcement of the meeting notes:
SBICs are privately-owned and operated investment funds that make investments in U.S. small businesses and are licensed by the SBA. SBICs may obtain access to SBA-guaranteed loans to match privately raised capital, which increases the amount of capital these funds can invest in American small businesses.
To facilitate the discussion, members will hear from an SBIC fund and a practitioner who will, among other things: provide an overview of the SBIC program and recent changes, including the introduction of a new type of SBA-guaranteed loan to private funds; address the regulatory framework governing SBICs; and share their views on successes and challenges to date. The discussion will commence with remarks by Committee member Bailey DeVries, who leads the SBIC program in her role as the SBA’s Associate Administrator and Head of Office of Investment and Innovation.
The full agenda, meeting materials, and information on how to watch the meeting are available on the newly revamped www.sec.gov.
Speaking of the SEC’s newly revamped website, the SEC issued a notice on Friday indicating that, due to a technological error, members of the public trying to use the agency’s online comment form may have received a message indicating that they were unable to complete the submission during the period May 30 until June 26, 2024.
The notice indicates that the technological error affected online forms that can be used to submit comments on Commission rulemakings, self-regulatory organization matters, Public Company Accounting Oversight Board proposed rule changes, and other matters open for public comment. Commenters were able to submit comments during this time by sending an email to rule-comments@sec.gov or by sending the comments letters in paper to the SEC’s address.
The notice indicates that the SEC has now been resolved, and commenters can submit their comments now using the online portal. There is no need to resubmit comments that were previously submitted via alternative means and are now posted on the SEC’s website.
The ESG world hasn’t been static and neither have demands on your time and needs for usable information. Therefore, starting next week, you’ll notice some changes for the summer that enhance our service and value to members. We will be improving curation of external resources and creating more original practical content you can use for your organization or in advising clients. Practicality and usability of the website and its content remain core, but there will be more information geared to new and mid-level ESG practitioners. PracticalESG.com will better help them understand ESG generally, how that fits in to company practices/operations and support their professional growth cost effectively.
– In-house staff can use our focused resources to get up-to-speed quickly to support managers and executives efficiently;
– Outside advisors can also learn key topics and respond quickly to needs of their supervisors and inquiries from clients.
In bettering our resources, you will see more focus on a smaller number of major issues at the moment:
– EU sustainability regulations
– The hard-dollar business case for ESG/linking to business fundamentals (and by extension – protecting your department funding and job)
– CSO burnout
– AI in ESG
– Simplifying ESG/sustainability communications
Don’t worry – we will still cover other important ESG topics but we’re improving resources that are most relevant. And we continue to rely exclusively on experienced professional staff and guest contributors, not AI. One noticeable change will be the blog schedule – blogs will be published Tuesday through Thursday only so we can invest our time in serving you best.
I encourage you to sign up today for PracticalESG.com if you are not already a member. PracticalESG.com is a trusted resource for practical ESG guidance, updates and more. You can access a wide range of resources that are critical to anyone who must stay abreast of ESG matters for their job. You can sign up online, contact a Specialist at Sales@CCRcorp.com or call 1-800-737-1271.
It’s probably not an understatement to characterize many of the decisions issued by the SCOTUS in its recently completed term as “momentous” – but it may not have occurred to companies to think about the potential impact of some of those decisions when preparing risk factor disclosure for upcoming SEC filings. A recent Bryan Cave blog highlighting matters that companies should consider when preparing their second quarter 10-Q points out the potential risk factor implications of the Court’s decisions limiting the authority of federal agencies:
The recent Supreme Court term produced several landmark decisions affecting administrative agencies, including:
– Loper Bright Enterprises v. Raimondo – ending long-standing “Chevron” deference to administrative agency interpretations and requiring courts to exercise their judgment in deciding whether an agency has acted within its statutory authority, such as when determining the meaning of ambiguous statutes.
– Corner Post, Inc. v. Board of Governors, FRS – allowing “facial challenges” of regulations governed by the Administrative Procedure Act within six years after “injury” – even if more than six years after the regulation became effective and where the plaintiff was newly-created specifically to challenge the regulation.
– Ohio v. EPA – among other things, faulting EPA for failing to provide a “reasoned response” to certain comments viewed by the agency as not significant or pertinent when adopting final regulations under an arbitrary and capricious review.
The effect of these decisions will play out over time as litigation develops, with some commenters predicting “hundreds and hundreds of challenges to very old rules”. Companies that operate in regulated industries, as well as those that rely on established regulatory environments, should evaluate potential risks of future challenges to agency rules or interpretations – particularly by competitors that operate at a regulatory disadvantage. Note that some regulations may not be vulnerable under Corner Post because they governed by statutes with their own distinct limitations provisions.
The blog also recommends that companies consider the potential implications of elections in the United States and Europe when drafting risk factor disclosure. In addition to its commentary on risk factors, the blog also reminds companies of their disclosure obligations with respect to trading plans and the need to review director nomination bylaws in light of pending litigation in Delaware.
We’ve been covering the controversy surrounding the 2024 amendments to the DGCL over on the DealLawyers.com Blog, but the CII has recently submitted a letter to Del. Gov. John Carney urging him to veto the amendments, which the Delaware Legislature passed late last month, and I thought it was worth sharing with the readers of this blog.
One of the most controversial aspects of the amendments is new Section 122(18), which permits a board to agree to governance arrangements giving a stockholder veto powers over a range of corporate actions that traditionally have been solely within the ambit of the board’s authority. That provision is intended to address Vice Chancellor Laster’s decision invalidating such an arrangement in West Palm Beach Firefighters v. Moelis, (Del. Ch.; 2/24). This excerpt from the CII’s letter argues that Section 122(18) raises many of the same concerns for its members as dual class capital structures:
For CII and its members, we strongly believe that permitting stockholder agreements to contain the provisions at issue in the Moelis case as authorized by S.B. 313 would disadvantage long term investors. One of the core principles of corporate governance is the principle of one share, one vote. Currently, for a powerful founder to have full control rights — of the sorts granted to Mr. Moelis and authorized by S.B. 313 — a company generally must put these provisions into the certificate of incorporation and go public with a multi-class capital structure.
Because this is such an important protection for investors, both the New York Stock Exchange and the Nasdaq Stock Market prohibit companies traded on those exchanges from engaging in a “midstream” recapitalization that would create a new class of super-voting stock. However, it appears that under the provisions of S.B. 313, a company could instead go public with a single class capital structure and then, after the company is already public, confer comprehensive control rights by contract without any shareholder vote.
We believe many CII members and other long-term investors – whether they object to multi-class capital structures or not – would find very troubling this post-IPO transformation to a type of multi-class capital structure without a shareholder vote.
I think the CII raises a legitimate concern, but I also think that it overstates that concern when it points to the possibility of companies entering into such an agreement post-IPO. Despite the authority granted by Section 122(18), boards still owe fiduciary duties to their stockholders, and entering into such an agreement with an affiliated stockholder or one which has the effect of changing control of the company could subject the board’s decision to heightened scrutiny. My guess is that boards are going to proceed with caution when considering such a governance agreement post-IPO.
Despite the objections from the CII and others, all the reporting I’ve seen says that Gov. Carney is likely to sign the legislation. The changes that are being made to the DGCL are pretty seismic, and even if you’re not an M&A lawyer, you should definitely check out our DealLawyers.com webcast – “2024 DGCL Amendments: Implications & Unanswered Questions” – on Tuesday, July 23rd at 2 pm eastern.
Thank you to all our loyal blog readers who participated in our second anonymous poll to help us prepare for a game show featuring our SEC All-Stars as contestants at our Proxy Disclosure and Executive Compensation Conferences. In the interest of full disclosure, I pushed hard for a “Hunger Games” format for this thing but was outvoted by my more civilized colleagues who were set on a “Family Feud”-style competition. I never get to have any fun.
Anyway, we’re coming back to you again to seek your response to one of the securities law-adjacent questions we’ll be submitting to our contestants. In case you recently arrived from a distant galaxy and don’t know how Family Feud works, the contestants will need to identify the most popular answers that you provided in order to win fabulous prizes absolutely nothing! If you have a few seconds to spare, please type in a response to this anonymous poll. We’ll gather and rank responses by popularity. Responses will be hidden, so you’ll have to join day 1 of our Conferences (in San Francisco or virtually) to hear whether your response made the “most popular” list.
Speaking of our Conferences, our “early bird” deal for individual in-person registrations ($1,750, discounted from the regular $2,195 rate) ends July 26! We hope many of you decide to join us in San Francisco, but if traveling isn’t in the cards at that time, we also offer a virtual option (plus video replays & transcripts for both in-person and virtual attendees!) so you won’t miss out on the practical takeaways our speaker lineup will share. (Also check out our discounted rate options for groups of virtual attendees!)
You can register now by visiting our online store or by calling us at 800-737-1271.
Earlier this year, the NYSE submitted a proposed rule change to the SEC that would extend the period during which a SPAC that hasn’t completed a deSPAC can remain listed on the Exchange, if that SPAC has entered into a definitive agreement for its deSPAC. On Tuesday, the SEC issued a release instituting proceedings to determine whether or not to approval the rule proposal. While the SEC stressed that it hasn’t determined whether or not to approve the rule, this excerpt from the release suggests it’s heading toward a “thumbs down” of the NYSE’s proposal in its current form:
The Exchange has proposed a fundamental change to the well-established requirement that a SPAC’s Business Combination must be consummated within three years or face delisting, and is seeking to extend this time requirement to allow up to 42 months for a SPAC to complete its Business Combination if the SPAC has entered into a “definitive agreement” to consummate its Business Combination.20 In support of the proposed change, the Exchange states that once a definitive agreement is entered into, a SPAC “represents a significantly different investment” because more information will be available to investors about the operating asset the SPAC intends to own.
The three-year limit, however, was put in place to provide protection for public shareholders by restricting the time period a SPAC could retain shareholder funds without consummating a Business Combination. The Exchange does not address how the proposal would affect shareholder protection or why it is appropriate for a SPAC to retain shareholder funds past the current maximum time period of three years and how that would be consistent with the investor protection and public interest requirements of Section 6(b)(5) of the Act.
Accordingly, the Commission believes there are questions as to whether the proposal is consistent with Section 6(b)(5) of the Act and its requirements, among other things, that the rules of a national securities exchange be designed to protect investors and the public interest and whether the Exchange has provided an adequate basis for the Commission to conclude that the proposal would be consistent with Section 6(b)(5) of the Act.
The SEC also points out that the proposal to extend the listing raising concerns under the Investment Company Act, since the SEC noted in the adopting release for its SPAC disclosure rules that SPACs that hang around for an extended period with their assets invested primarily in securities start to look an awful lot like investment companies, and that this concern grows greater the longer it takes for a SPAC to complete a deSPAC deal.
