Has all of the current political unrest and social upheaval had any impact on the drive for political spending disclosure? Apparently so, according to the nonpartisan Center for Political Accountability, which reports in its June newsletter that support for shareholder proposals in favor of political spending disclosure hit record highs this past proxy season. But one risk potentially arising out of political spending is reputational, which could fracture a company’s relationship with its employees, customers and shareholders. As companies and CEOs increasingly offer welcome statements on important social issues such as climate change, healthcare crises and racial injustice, the current heated political climate has heightened sensitivity to any dissonance or conflict between those public statements and the company’s political contributions. When a conflict between action in the form of political spending and publicly announced core values is brought to light, will companies be perceived to be merely virtue-signaling or even hypocritical? To borrow a phrase from asset manager BlackRock, if the public perceives that these companies are not actually doing “the right thing”—even as they may be saying the right thing—will they lose their “social license” to operate? (See this PubCo post.) CPA’s brand new report on Conflicted Consequences explores just such risks.
Delaware bill to update emergency powers, revise PBC provisions and amend indemnification provisions signed into law
Delaware Assembly Bill 341 has finally been signed into law. Among other things, the bill confirms the availability of specific powers relating to stockholders’ meetings that may be exercised by the board during an emergency condition, such as the current pandemic. These powers include changing the date, time and place of meetings (including to virtual formats) and, for public companies, providing notice of these changes through an SEC filing. These provisions are effective retroactively as of January 1, 2020. (See this PubCo post.) The bill also makes it easier to convert a traditional corporation to a public benefit corporation or a PBC to a traditional corporation and amps up the protections for directors of a PBC. (See this PubCo post.) Another provision of the bill, less widely discussed, relates to indemnification, discussed below.
This post is a revision of my earlier post, updated to reflect the adopting release for the final rule and the supplemental guidance.
Earlier this week, at a virtual open meeting, the SEC, by a vote of three to one, adopted new amendments to the proxy rules, modified from the original proposal issued in November last year, regarding proxy advisory firms (see this PubCo post). The amendments make proxy voting advice subject to the proxy solicitation rules and condition exemptions from those rules for proxy advisory firms, such as ISS and Glass Lewis, on disclosure of conflicts of interest and adoption of principles-based policies to make proxy voting advice available to the subject companies and to notify clients of company responses. The amendments also provide two non-exclusive safe harbors designed to satisfy the conditions to the exemptions. The SEC also voted by the same margin to publish new supplementary guidance for investment advisers addressing how advisers should consider company responses in light of the new amendments to the proxy rules. SEC Chair Jay Clayton observed that the final rules and guidance are the product of a 10-year effort—commencing with the SEC’s 2010 Concept Release on the U.S. Proxy System—which has led to “robust discussion” from all market participants. The original proposal issued in November generated substantial comment and criticism, and the SEC took much of it into account in developing the final rule, which now only “encourages” what had been imperative in the proposal—namely that proxy advisors conduct a review and feedback process with issuers.
This morning, at an actual uncancelled open (virtual) meeting, the SEC, by a vote of three to one (I wrote that part before the meeting), adopted new amendments to the proxy rules, modified from the original proposal issued in November last year, regarding proxy advisory firms (see this PubCo post). The amendments make proxy voting advice subject to the proxy solicitation rules and condition exemptions from those rules for proxy advisory firms, such as ISS and Glass Lewis, on disclosure of conflicts of interest and adoption of principles-based policies to make proxy voting advice available to the subject companies and to notify clients of company responses. The amendments also provide two non-exclusive safe harbors that satisfy the conditions to the exemptions. The SEC also voted by the same margin to publish new supplementary guidance to investment advisers addressing how advisers should consider company responses in light of the new amendments to the proxy rules. SEC Chair Jay Clayton observed that the final rules and guidance are the product of a 10-year effort—commencing with the SEC’s 2010 Concept Release on the U.S. Proxy System—which has led to “robust discussion” from all market participants. The original proposal issued in November generated substantial comment and criticism, and the SEC took much of it into account in developing the final rule, which now encourages what had been imperative in the proposal—namely that proxy advisors conduct a review and feedback process with issuers.
In Salzberg v. Sciabacucchi (pronounced Shabacookie), the Delaware Supreme Court unanimously held that charter provisions designating the federal courts as the exclusive forum for ’33 Act claims are “facially valid.” (See this PubCo post.) Given that Sciabacucchi involved a facial challenge, the Court had viewed the question of enforceability as a “separate, subsequent analysis” that depended “on the manner in which it was adopted and the circumstances under which it [is] invoked.” With regard to the question of enforceability of exclusive federal forum provisions if challenged in the courts of other states, the Court said that there were “persuasive arguments,” such as due process and the need for uniformity and predictability, that “could be made to our sister states that a provision in a Delaware corporation’s certificate of incorporation requiring Section 11 claims to be brought in a federal court does not offend principles of horizontal sovereignty,” and should be enforced. But would they be? Following Sciabacucchi, many Delaware companies that did not have FFPs adopted them, and companies with FFPs involved in current ’33 Act litigation tried to enforce them by moving to dismiss state court actions. One such case is currently being fought in California state court involving ’33 Act claims against Dropbox, and, as noted in this column in Reuters, a group of former Delaware jurists and a former SEC Commissioner have filed an amicus brief in support of the company’s effort to enforce the FFP in that case.
Although it may seem like the last millennium, it was only in January of this year that the CEO of BlackRock, Laurence Fink, in his annual letter to CEOs, announced a number of initiatives designed to put “sustainability at the center of [BlackRock’s] investment approach.” (See this PubCo post.) According to Fink’s letter, “[c]limate change has become a defining factor in companies’ long-term prospects.” Although he had seen many financial crises over the course of his long career, in the broad scheme of things, they were all ultimately relatively short-term in nature. Not so with climate change: “Even if only a fraction of the projected impacts is realized, this is a much more structural, long-term crisis.” And investors are now “recognizing that climate risk is investment risk,” making climate change the topic that clients raised most often with BlackRock. To that end, BlackRock announced a number of new initiatives, among them “strengthening our commitment to sustainability and transparency in our investment stewardship activities.” As part of that initiative, BlackRock said that it would hold companies accountable if they failed to make sufficient progress. That position came in the face of press reports, like this one in the NYT, highlighting what appeared to be stark inconsistencies between the BlackRock’s advocacy positions and its proxy voting record, protests outside of its offices by climate activists, letters from Senators and charges of greenwashing. So what has been the result? BlackRock has just published a report describing its investment stewardship actions taken during 2020 in connection with climate and other sustainability issues. Given that BlackRock is the largest asset manager, companies may want to take note.
Will companies accede to calls for actions to improve racial and ethnic diversity in hiring and promotion? California considers a new mandate for racial/ethnic board diversity
In this excellent NYT article from early June, the author painfully explores the view of many African-American executives that, notwithstanding the public condemnations of racism by many public companies and the “multimillion-dollar pledges to anti-discrimination efforts and programs to support black businesses,” still, many of these companies “have contributed to systemic inequality, targeted the black community with unhealthy products and services, and failed to hire, promote and fairly compensate black men and women. ‘Corporate America has failed black America,” said [the African-American president of the Ford Foundation]. ‘Even after a generation of Ivy League educations and extraordinary talented African-Americans going into corporate America, we seem to have hit a wall.’” In the article, a number of Black executives offer recommendations for actions companies should take to begin to implement the needed systemic transformation. And now, third parties—from proxy advisors to institutional investors to legislators—are taking steps to induce companies to take some of these actions. Will they make a difference?
As you know, there has been a fairly sustained clamor for the SEC to impose a requirement for climate change and sustainability disclosure. For example, in May, the SEC’s Investor Advisory Committee recommended that the SEC “set the framework” for issuers to report on material environmental, social and governance information, concluding that “the time has come for the SEC to address this issue.” (See this PubCo post.) However, SEC Chair Jay Clayton and others at the SEC have been fairly vocal about their reluctance to impose a prescriptive sustainability disclosure requirement beyond principles-based materiality. But what about a narrower request? A mandate for just a single piece of information? This rulemaking petition filed by Impax Asset Management LLC, investment adviser to Pax World Funds, a “specialist asset manager investing in the transition to a more sustainable economy,” requests that the SEC “require that companies identify the specific locations of their significant assets, so that investors, analysts and financial markets can do a better job assessing the physical risks companies face related to climate change.”
With so much going on in connection with COVID-19 and its impact, it would be easy to overlook the rest of the SEC’s agenda. And it’s a lengthy one. The new Spring Regulatory Flexibility Act Agenda was published at the end of June, so it’s time to look at what’s on deck for the SEC in the coming year or so. (That reference to “on deck” may be the only sports anyone gets this year….) SEC Chair Jay Clayton has repeatedly made clear his intent to make the RegFlex Agenda more realistic, streamlining it to show what the SEC actually expects to take up in the subsequent period. (Clayton has previously said that the short-term agenda signifies rulemakings that the SEC actually planned to pursue in the following 12 months. See this PubCo post and this PubCo post.) The SEC’s Spring 2020 short-term and long-term agendas reflect the Chair’s priorities as of March 31, when the agenda was compiled. What stands out here are the matters that have, somewhat surprisingly, moved up onto the final-rule-stage agenda—think universal proxy—from perpetual residence on the long-term (i.e., the maybe never) agenda.