Yesterday, the staff of the SEC’s Office of the Chief Accountant and Corp Fin released Staff Accounting Bulletin No. 120, which provides guidance about proper recognition and disclosure of compensation cost for “spring-loaded” awards made to executives. According to the SEC press release, “[s]pring-loaded awards are share-based compensation arrangements where a company grants stock options or other awards shortly before it announces market-moving information such as an earnings release with better-than-expected results or the disclosure of a significant transaction.” When these grants are not routine, according to the staff, they “merit particular scrutiny.” Notably, the staff advises that, in measuring compensation actually paid to executives, companies “must consider the impact that the material nonpublic information will have upon release. In other words, companies should not grant spring-loaded awards under any mistaken belief that they do not have to reflect any of the additional value conveyed to the recipients from the anticipated announcement of material information when recognizing compensation cost for the awards.”
[This post revises and updates my earlier post primarily to reflect the contents of the proposing release.]
At an open meeting on November 17, the SEC voted, three to two, to propose amendments to the proxy rules that would reverse some of the key provisions governing proxy voting advice that were adopted in July 2020. Those amendments had codified the SEC’s interpretation that made proxy voting advice subject to the proxy solicitation rules. The intent was not, however, to cause ISS and other proxy voting advice businesses, which the SEC refers to as “PVABs,” to file a slew of proxy statements. To address the real issue that the SEC was targeting, the 2020 rules added to the exemptions from those solicitation rules two significant new conditions—one requiring disclosure of conflicts of interest and the second calling for PVABs to engage with the companies that are the subjects of their advice. The proposed amendments would rescind that second central condition—which some might characterize as a core element, if not the core element, of the 2020 amendments. The proposal would also rescind a note to Rule 14a-9, adopted as part of the 2020 rules, that provided examples of situations in which the failure to disclose certain information in proxy voting advice may be considered misleading. According to SEC Chair Gary Gensler, PVABs “play an important role in the proxy process. Their clients deserve to receive independent proxy voting advice in a timely manner.” The U.S. Chamber of Commerce had quite a different take on the proposal, contending that the “rules finalized by the SEC last year created a level playing field and ensured that investors would have access to high quality information free of bias. If the SEC decides to roll back these rules, it will signal that it is not serious about rooting out and eliminating misinformation and conflicts of interest in the proxy process and will instead place special interests at the head of the line, harming investors and markets. We will engage with the SEC to stop these misguided proposals from moving forward.” The proposal will be open for public comment for 30 days after publication of the proposing release in the Federal Register.
Yesterday, yet another complaint was filed in federal district court charging that California’s board diversity statutes, SB 826 and AB 979, are unconstitutional under the equal protection provisions of the 14th Amendment. This complaint was filed by The National Center for Public Policy Research, which, you may recall, has also filed a petition challenging the Nasdaq board diversity rule (see this PubCo post and this PubCo post). The NCPPR describes itself as “a non-profit 501(c)(3) organization that supports free market solutions to social problems and opposes corporate and shareholder social activism that detracts from the goal of maximizing shareholder returns.” The case is National Center for Public Policy Research v. Weber, and the initial scheduling conference for this case isn’t set to occur until March of next year.
In early January 2015, hedge fund activist Trian launched a closely followed proxy fight against DuPont, claiming that the company had underperformed and that it should, among other things, be broken up into three parts. DuPont responded that, through implementation of its own strategic plan, it had delivered total shareholder return and cumulative capital return in excess of its proxy peers and the S&P 500. Rejecting DuPont’s offer of a single board seat, Trian nominated a short slate of four directors and commenced an election contest. Fast forward to February, when Trian submitted to the DuPont board a request that DuPont allow the use of a “universal proxy,” thus allowing shareholders to vote for their preferred combination of DuPont and Trian nominees using a single proxy card. Trian argued that it would provide shareholders with “maximum freedom of choice” and represent “best-in-class corporate governance.” After consulting “with a range of proxy and governance experts” and evaluating the DuPont shareholder base, DuPont rejected that request, contending that there was “insufficient infrastructure” to support the use of a universal proxy card and that the process could “undermine voting access” for DuPont’s huge contingent of retail shareholders. In particular, DuPont was concerned that “the use of a universal proxy card would limit voting options for our ‘Street-name’ holders, as well as deprive holders of the ability to simply sign and return voting forms without marking a preference.” At the annual meeting, Trian lost its bid, and DuPont’s full slate of nominees was elected. But the DuPont story ultimately ended favorably for Trian, notwithstanding its loss in the proxy contest. After the election contest, Trian reignited its battle to break up the company and, after the company failed to hit targeted earnings, the CEO resigned. DuPont ultimately entered into an agreement to be acquired. A new rulemaking from the SEC to mandate the use of universal proxy, adopted last week by a vote of four to one, would likely have affected the course of that campaign and perhaps its outcome. Will we see more contested elections in the future?
Since the onset of the COVID-19 pandemic, the number of whistleblower complaints received by regulators has exploded on both sides of the Atlantic. That’s the subject of this new Cooley Alert, Whistleblower Complaints and Rewards Explode Worldwide, from our White Collar Defense and Investigations group.
SEC adopts universal proxy and proposes significant amendments to 2020 rules governing proxy voting advice
At an open meeting yesterday, the SEC took up two rulemakings aimed at shareholder voting. First, the SEC voted four to one (a bipartisan if not unanimous vote) to adopt amendments to the proxy rules—initially proposed in 2016 and then shelved—relating to the use of universal proxy cards. The final rules require, in a contested director election, that proxy cards identify all director nominees for election at the upcoming shareholder meeting, including those candidates on dissident slates, allowing proxy voters to split their tickets and more closely replicate in-person voting. The final rules also enhance disclosures regarding voting options and voting standards that will apply to all director elections. According to SEC Chair Gary Gensler, the amendments “address concerns that shareholders voting by proxy cannot vote for a mix of dissident and registrant nominees in an election contest, as they could if voted in person….Today’s amendments will put these candidates on the same ballot. They will put investors voting in person and by proxy on equal footing. This is an important aspect of shareholder democracy.” The Council of Institutional Investors, which had petitioned the SEC in 2014 to adopt universal proxy, hailed the rule: “Imagine if, in a political election, you could vote only for Democrats or only for Republicans….That has been the dilemma facing most investors voting in a proxy contest at U.S. companies.”
The SEC also voted, three to two, to propose amendments to the proxy rules governing proxy voting advice, reversing some key provisions of the controversial amendments adopted in July 2020. Those amendments had codified the SEC’s interpretation making proxy voting advice subject to the proxy solicitation rules and included a significant new condition to the exemptions (with two components) from those solicitation rules essentially requiring proxy advisory firms to engage with the companies that are the subjects of their advice. The proposed amendments would rescind the key condition regarding engagement as well as the 2020 changes that were made to the proxy rules’ liability provision. According to Gensler, proxy advisory firms “play an important role in the proxy process. Their clients deserve to receive independent proxy voting advice in a timely manner.” The U.S. Chamber of Commerce said that the “rules finalized by the SEC last year created a level playing field and ensured that investors would have access to high quality information free of bias. If the SEC decides to roll back these rules, it will signal that it is not serious about rooting out and eliminating misinformation and conflicts of interest in the proxy process and will instead place special interests at the head of the line, harming investors and markets. We will engage with the SEC to stop these misguided proposals from moving forward.”
It’s been weeks since the SEC last took SPACs to task! According to Bloomberg, the SEC is now requiring many SPACs to “Big R” restate their financial statements because they tripped over the classification of certain shares they offered to investors. Auditors with whom Bloomberg spoke said that the latest SPAC accounting snafu relates to incorrect categorization of Class A shares—which are typically redeemable—as “permanent equity instead of temporary equity.” One auditor described the issue as “pervasive[:] everyone’s dealing with it because everyone did it wrong.”
According to audit firm Deloitte, “[i]nformative climate reporting requires a complex transformation of reporting processes, of data collection, education of the finance function, and in many cases, of the audit committee itself. Yet, despite the urgency and magnitude of the task, many boards are hesitating in the face of inconsistent standards, fragmented global standard-setting, and myriad expectations from investors.” Just how prepared are companies, their boards and especially their audit committees to deal with climate risk and climate reporting? That’s the big question that Deloitte asked 353 audit committee members globally (56% of whom were chairs) in September 2021. The answer? Not so much. According to Deloitte’s new report, 42% of respondents indicated that their company’s “climate response is not as swift and robust as they would like” and almost half “do not believe that they are well-equipped to fulfil their climate regulatory responsibilities.” Deloitte called the responses “sobering.”
While the global powers are occupied at the COP26 climate summit with negotiating and pledging (or, is it more “blah, blah, blah,” as teenage activist Greta Thunberg contends in some, uh, straight talk?), and we await the SEC’s expected climate disclosure framework, it might be worthwhile to get a handle on what companies are doing about sustainability reporting in the meantime. To help companies understand the current state of the art, CEO advisory firm Teneo surveyed 200 sustainability reports from S&P 500 companies in eleven industries published in the period between January 1 to June 30, 2021. Teneo’s report, The-State-of-U.S.-Sustainability-Reporting, provides useful samples, market statistics for various aspects of the content and design of these reports, as well as some practical considerations.
Last week, ISS released for public comment its proposed benchmark policy changes for 2022. If adopted, the proposed policy changes would apply to shareholder meetings held on or after February 1, 2022. The proposed changes for U.S. companies relate to board diversity, board accountability for unequal voting rights, board accountability for climate disclosure by high GHG emitters and say-on-climate proposals.