On Monday, the International Sustainability Standards Board released its first two reporting standards. Not another ESG standard you say? Aren’t there enough standards already in play, with both the US and Europe proposing or adopting mandatory standards? Not to mention that the ISSB standards are just voluntary, although some countries, such as Canada, Japan, Hong Kong and the UK, may adopt the standards as mandatory. But take note—the WSJ suggests that the ISSB standards could well become “the global baseline” because “the advantages of using a single standard worldwide may, for many companies, outweigh the disadvantages of being more demanding than the SEC’s coming climate reporting rules.” According to Mary Schapiro, former SEC Chair and current Head of the TCFD Secretariat and Vice Chair for Global Public Policy at Bloomberg L.P., “The global economy needs common reporting standards to reduce fragmentation and drive comparability in climate-related financial data. Built upon the foundation of the TCFD framework, the ISSB Standards provide a global baseline for companies to disclose decision-useful, climate-related financial information—information that is critical for creating more transparent markets, helping achieve a smooth low-carbon transition, and building a more resilient and sustainable global economy.”
In May, SEC Chief Accountant Paul Munter, quoted here, cautioned his conference audience about the potential for audit committee overload. “More demands are being put on audit committees, sometimes on topics outside their core responsibility,” he said. “Audit committees need to be continually vigilant that they have enough time to focus on their core mission—protecting investors—and don’t let other topics cloud that out.” While the AC’s primary responsibilities are generally thought to be oversight of financial reporting, including the audit of a company’s financial statements and internal control over financial reporting, these days, the AC often becomes the default committee of choice for oversight of other emerging risks, such as cybersecurity and even ESG. With ACs now perhaps the “kitchen sink of the board,” are its members stretched too thin to carry out fundamental responsibilities? Are members being asked to operate outside of their core skillsets? What is the impact? These concerns appear to have prompted the panel at last week’s meeting of the SEC’s Investor Advisory Committee discussing AC workload and transparency.
On Wednesday, SEC Commissioner Mark Uyeda spoke to the Society for Corporate Governance 2023 National Conference on the topic of shareholder proposals under rule 14a-8, a topic on which, historically, the commissioners’ energetic back-and-forth has been reflected in Corp Fin interpretations that have literally shifted back and forth. You might think these reversals are a new thing, but Uyeda reminds us about the goings-on in 2015, when Whole Foods was first permitted to exclude, as a conflicting proposal under Rule 14a-8(i)(9), a proxy access proposal, only to have the staff reverse course shortly thereafter. (See this PubCo post, this PubCo post and this PubCo post.) “Relying on the Commission’s rules, or its staff’s positions,” he later observes, “in this area is akin to building a sand castle on the beach. Any rule or interpretation, no matter how recently adopted, is at risk of being erased by the next wave.” However, Uyeda finds the reversals over the course of the last few years particularly problematic. In his view, the recent interpretative changes in SLB 14L have led to a surfeit of proposals the aggregate effect of which he finds to be “value-eroding.” He suggests some approaches to address the problem. Are we looking at a fundamental—some might say radical— reimagining of the shareholder proposal process?
The SEC’s Spring 2023 Reg-Flex Agenda—according to the preamble, compiled as of April 10, 2023, reflecting “only the priorities of the Chair”—has now been posted. Here is the short-term agenda, which shows most Corp Fin agenda items targeted for action by October 2023, potentially making the next four months an especially frenetic period, with only a few proposal-stage items targeted for April 2024. And here is the long-term (maybe never) agenda. Describing the new agenda, SEC Chair Gary Gensler observed that “[t]echnology, markets, and business models constantly change. Thus, the nature of the SEC’s work must evolve as the markets we oversee evolve. In every generation since President Franklin Roosevelt’s, our Commission has updated its ruleset to meet the challenges of a new hour. Consistent with our legal mandate, guided by economic analysis, and informed by public comment, this agenda reflects the latest step in that long tradition.”
The short-term agenda includes a half dozen or so potential proposals that were on the Fall 2022 agenda, but didn’t quite make it out of the starting gate, such as plans for disclosure regarding corporate board diversity and human capital. Similarly, issues related to the private markets are still awaiting proposals. The question of why and how to address the decline in the number of public companies has, in the recent past, been a point of contention among the commissioners: is excessive regulation of public companies a deterrent to going public or has deregulation of the private markets juiced their appeal, but sacrificed investor protection in the bargain? That debate may play out in the coming months with two new proposals targeted for October this year: a plan to amend the definition of “holders of record” and a proposal to amend Reg D, including updates to the accredited investor definition. And the behemoth proposal regarding climate change disclosure—identified on the last agenda as targeted for final action but not considered for adoption on the schedule as planned—reappears on the current calendar with a later target date. Will that new target be met? Notably, political spending disclosure is, once again, not identified on the agenda. That’s because Section 633 of the Appropriations Act once again prohibits the SEC from using any of the funds appropriated “to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.”
Last month, Cornerstone Research told us that accounting and auditing enforcement activity by the SEC in FY 2022 increased by 55% over the prior fiscal year to 68 enforcement actions, 25 of which alleged improper revenue recognition. Among the actions involving accounting restatements, 63% involved allegations regarding revenue recognition and internal control over financial reporting. We also saw a steep increase in actions against individuals, reportedly reflecting the emphasis of SEC Chair Gary Gensler on imposing individual accountability. (See this PubCo post.) With this new SEC Order charging USA Technologies, Inc., now known as …er… Cantaloupe, Inc.—clearly someone’s favorite fruit—with improper revenue recognition practices and ICFR violations, the SEC continues that trend. For their roles participating in these improper activities, the SEC also brought actions against USAT’s former VP of Sales and Marketing and its former Chief Services Officer.
This terrific Cooley Alert, Ninth Circuit Upholds Delaware Forum-Selection Clause, Dismisses Federal Derivative Action, from our Securities Litigation + Enforcement group, discusses a recent Ninth Circuit decision, Lee v. Fisher, upholding the enforceability of forum-selection clauses requiring shareholders to file derivative claims—even derivative claims brought under Section 14(a) of the Exchange Act—in the Delaware Court of Chancery. Because Section 14(a) claims can be brought only in federal court, the Alert points out, the upshot of this decision is that shareholders cannot assert derivative claims under Section 14(a) in any court.
Last week, both the NYSE and Nasdaq filed with the SEC amendments delaying until October 2 the effective dates of their proposed listing standards requiring listed issuers to develop and implement clawback policies. On Friday afternoon, the SEC approved the proposed rule changes, as modified by the respective Amendments No. 1, on an accelerated basis. What does that time delay mean for companies? Under the SEC final rules and the proposed listing standards, each listed issuer is required to adopt the mandated clawback policy no later than 60 days following the effective date of the rule. Prior to the amendments, the effective dates were designated by both exchanges as the SEC approval dates, which the SEC had just extended to June 11. (See this PubCo post.) Now, with October 2 as the effective date for both proposals, companies will have until December 1 to put their clawback policies in place.
You might recall that this past proxy season witnessed a significant number of shareholder proposals related to ESG—from both sides of the aisle. (See this PubCo post.) One of those proposals was submitted by the National Center for Public Policy Research to The Kroger Co., which operates supermarkets, regarding the omission of consideration of “viewpoint” and “ideology” from its equal employment opportunity policy. Kroger sought to exclude the proposal as “ordinary business” under Rule 14a-8(i)(7), and Corp Fin concurred. After Corp Fin and the SEC refused reconsideration of the decision, the NCPPR petitioned the Fifth Circuit for review. Now, the National Association of Manufacturers has requested, and been granted, leave to intervene in the case, claiming that neither the federal securities laws nor the First Amendment allows the SEC to use Rule 14a-8 to compel companies to speak about contentious political or social issues, such as abortion, climate change, diversity or gun control, that are “unrelated to its core business or the creation of shareholder value.” That is, NAM isn’t just arguing about Corp Fin’s greenlighting of the exclusion of NCPPR’s proposal—in fact, NAM agrees that “Kroger should not be forced to include petitioners’ policy proposal in Kroger’s proxy statement.” Rather, NAM is upping the ante considerably by challenging whether the SEC has any business “dictat[ing] the content of public company proxy ballots and the topics on which shareholders are required to cast votes.” According to NAM’s Chief Legal Officer, “[m]anufacturers are facing an onslaught of activists seeking to hijack the proxy ballot to advance narrow political agendas, and the SEC has become a willing partner in the effort. The corporate proxy ballot is not the appropriate venue for policy decisions better made by America’s elected representatives, and manufacturers are regularly caught in the middle as activists on the left and the right bring fights from the political arena into the boardroom.”
On Thursday, SCOTUS decided Slack Technologies v. Pirani in a unanimous opinion by Justice Gorsuch holding that, even in a registration by direct listing, §11(a) liability extends only to shares that are traceable to an allegedly defective registration statement. As you know, §11 provides statutory standing to sue for misstatements in a registration statement to any person acquiring “such security,” historically interpreted to mean a security registered under the specific registration statement. However, in Pirani v. Slack Technologies, a divided three-judge panel of the 9th Circuit had ruled that the plaintiff could recover under §11 even in the absence of tracing to the registration statement for the direct listing. Now, SCOTUS has reversed and remanded the case for reconsideration in light of the Court’s decision. Given the difficulty of tracing in connection with direct listings, where both registered and preexisting unregistered shares may be sold at the same time, the question put to Slack counsel by Justice Kavanaugh during oral argument in April looms large: does the Court’s determination in this case “essentially transform the ’33 Act into an opt-out regime for direct listings”?
Federal court holds unconstitutional California’s board diversity statute regarding “underrepresented communities”
There have been a number of challenges to California’s board diversity legislation, SB 826, the board gender diversity statute, and AB 979, the board diversity statute regarding “underrepresented communities.” In two cases, Crest v. Padilla I and II, filed in state court, the plaintiffs notched wins and the court issued injunctions against implementation and enforcement of these two statutes. Both of these cases are currently on appeal, and the injunctions remain in place. But there were also cases filed in federal court, and, in one of those cases, Alliance for Fair Board Recruitment v. Weber, the U.S. District Court for the Eastern District of California has just granted the Plaintiff’s motion for summary judgment, concluding that AB 979 is unconstitutional on its face. The federal court decision could have reverberations in other states and potentially influence the ongoing state court appeals (as could an earlier decision on SB 826 by the Court going the other way. See the third SideBar below.)