Corp Fin posts new CDIs regarding the use of universal proxy cards
Corp Fin has issued three new CDIs regarding universal proxy. In November 2021, the SEC amended the federal proxy rules to mandate the use of universal proxies in all non-exempt solicitations in connection with contested elections of directors of operating companies. By mandating the use of universal proxies—proxy cards that, when used in a contested election, include a complete list of all candidates for director duly nominated by both management and dissidents—the SEC’s rules now allow a shareholder voting by proxy to choose among director nominees in an election contest in a manner that closely mirrors in-person voting. (See this PubCo post.) The new CDIs address questions that have arisen in connection with compliance by dissident shareholders with advance notice provisions and the use by dissident shareholders of their own proxy cards. Below are brief summaries.
SEC reopens comment period (again) for proposal on stock buyback disclosure
Yesterday, the SEC announced that it was reopening (again) the public comment period for its proposed rule on stock buyback disclosure modernization, a rule proposed at the end of 2021. (Remember that the comment period for this proposal was previously reopened in October because of the “technical glitch.” See this PubCo post.) The proposal is focused on enhancing disclosure by requiring more detailed and more frequent and timely disclosure about stock buybacks. (See this PubCo post.) Why did the SEC reopen the buyback proposal comment period? Because, at the time the proposal was issued, the Inflation Reduction Act of 2022 had not yet been enacted, which meant that the implications of that Act could not be considered as part of the proposal’s original cost/benefit analysis. However, as demonstrated in a new memo from the SEC’s Division of Economic and Risk Analysis, the excise tax on stock buybacks imposed under the IRA could affect that analysis, and consequently, the public’s evaluation of the proposal. As a result, the SEC determined to make the DERA memo part of the comment file and to reopen the comment period for an additional 30 after publication of the reopening release in the Federal Register.
ISS issues benchmark policy updates for 2023
At the end of last week, ISS announced its benchmark policy updates for 2023. The policy changes will apply to shareholder meetings held on or after February 1, 2023, except for those with one-year transition periods. The changes for U.S. companies relate to policies regarding, among other things, unequal voting rights, problematic governance structures, board gender diversity, exculpation of officers, poison pills, quorum requirements, racial equity audits, shareholder proposals on alignment between public commitments and political spending and board accountability for climate among the Climate Action 100+. The results are based in part on the results of ISS’s global benchmark surveys (see this PubCo post) as well as a series of roundtables.
AT&T settles Reg FD charges for record penalty
Yesterday, the SEC announced that it had settled charges against AT&T for alleged violations of Reg FD for $6.25 million, an amount that it characterized as a “record penalty”—the “largest ever in a Reg FD case.” The case involved allegations of one-on-one disclosures by three company executives of AT&T’s “projected and actual financial results” to a number of Wall Street research analysts in violation of Reg FD and Exchange Act 13(a). (See this PubCo post.) The three executives agreed to pay $25,000 each to settle charges. After the federal district court for the SDNY denied summary judgment for both sides in September (see this PubCo post), the case appeared to be on its way to trial, but that was headed off by this new settlement. According to Gurbir Grewal, Director of Enforcement, the “actions allegedly taken by AT&T executives to avoid falling short of analysts’ projections are precisely the type of conduct Regulation FD was designed to prevent….Compliance with Regulation FD ensures that issuers publicly disclose material information to the entire market and not just to select analysts.”
California Appeals Court reinstates injunctions against California Board diversity laws
You may recall that, earlier this year, two Los Angeles Superior Courts struck down as unconstitutional two California laws mandating that boards of public companies achieve specified levels of board diversity and enjoined implementation and enforcement of the legislation. Those injunctions, however, were temporarily lifted as the state appealed. Now, the appeals court has vacated those temporary stays. What does it mean for the diversity legislation?
What is the financial impact of legislation targeting companies taking disfavored stances?
As discussed in this PubCo post, we’ve lately been witnessing a profusion of state and local legislation targeting companies that express public positions or adopt policies on sociopolitical issues or conduct their businesses in a manner disfavored by the government in power. Bloomberg observes that, while “companies usually faced mainly reputational damage for their social actions, politicians are increasingly eager to craft legislation that can be used as a cudgel against businesses that don’t share their social views.” And many of these state actions are aimed, not just at expressed political positions, but rather at environmental and social measures that companies may view as strictly responsive to investor or employee concerns, shareholder proposals, current or anticipated governmental regulation, identified business risks or even business opportunities. These laws are presumably detrimental to the targeted companies, but are there any adverse consequences for the state or locality adopting this legislation and its citizens? To better understand the phenomenon and its impact on financial market outcomes, this paper from authors at the University of Pennsylvania and the Federal Reserve Bank of Chicago looked at the impact of one example of this type of legislation—a law recently adopted in Texas that blocks banks from government contracts in the state if the banks restrict funding to oil and gas companies or gun manufacturers. The authors concluded that the Texas legislation has had, and is expected to continue to have, a “large negative impact on the ability for local governments to access external finance. Our results suggest that if economies around the world that are heavily reliant on fossil fuels attempt to undo ESG policies by imposing restrictions on the financial sector, local borrowers are likely to face significant adverse consequences such as decreased credit access and poor financial markets outcomes.”
Corporate Sustainability Reporting Directive receives final approval, applicable to US companies with EU presence
On Monday, according to this press release from the Council of the European Union, all 27 members of the European Council voted in favor of the adoption of the Corporate Sustainability Reporting Directive, the last step for the CSRD to become law in the EU. The new rules require subject companies […]
Should we link pay to ESG measures?
According to this report by The Conference Board, in collaboration with Semler Brossy and ESGAUGE, the vast majority (73% in 2021) of companies in the S&P 500 are “now tying executive compensation to some form of ESG performance.” To be sure, some companies have long tied executive comp to particular […]
SEC and DOJ conducting Rule 10b5-1 probe
As the SEC mulls its 10b5-1 proposal (see this PubCo post), neither its Enforcement Division nor the DOJ are waiting around to see what happens. According to Bloomberg, they are using data analytics “in a sweeping examination of preplanned equity sales by C-suite officials.” The question is whether executives “been gaming prearranged stock-sale programs designed to thwart the possibility of insider trading”? Of course, there have been countless studies and “exposés” of alleged 10b5-1 abuse over the years, the most recent being this front-page analysis of trading by insiders under Rule 10b5-1 plans in the WSJ (see this PubCo post). While these concerns have been percolating for quite some time, no legislation or rules have yet been adopted (although several bills have been introduced and the SEC proposed new regs at the end of 2021). Bloomberg reports that these investigations by Enforcement and the DOJ are consistent with the recent “tougher line on long-standing Wall Street trading practices during the Biden era. Federal officials requested information from executives early this year, said one person. They’re now preparing to bring multiple cases, said two other people.”
SEC reports Enforcement stats—the “risk-reward calculation is not what it was”
The SEC has announced its fiscal 2022 Enforcement stats, which hit new records. According to the press release, during the year, the SEC filed 760 total enforcement actions, representing a 9% increase over the prior year. That total included 462 new, or “stand-alone,” enforcement actions, which “ran the gamut of conduct, from ‘first-of-their-kind’ actions to cases charging traditional securities law violations.” The SEC also recovered a record $6.4 billion in civil penalties, disgorgement and pre-judgment interest in SEC actions, an increase of 68% from $3.8 billion in the prior year. Civil penalties, at $4.2 billion, were also the highest on record. The press release emphasized that the increase in penalties is intended to “deter future misconduct and enhance public accountability.” In a number of cases, the SEC “recalibrated penalties for certain violations, included prophylactic remedies, and required admissions where appropriate” to make “clear that the fines were not just a cost of doing business.” According to Director of Enforcement Gurbir Grewal, the SEC doesn’t “expect to break these records and set new ones each year because we expect behaviors to change. We expect compliance.” Interestingly, disgorgement, at $2.2 billion, declined 6% from last year. As reported by the WSJ, Grewal, speaking at a recent conference, highlighted the fact that the SEC imposed more penalties than disgorgements, which, in his view, “demonstrated that ‘the potential consequences of violating the law are significantly greater than the potential rewards.’… He added that the SEC ordered more than twice as much in disgorgements as it did in penalties for the five fiscal years before the last one. ‘So while disgorgement was slightly down from the prior year…it is the first time that the amount ordered to be paid in penalties has been double the amount ordered to be paid in disgorgement,’ he said. ‘The increased penalty-to-disgorgement ratio nonetheless demonstrates that the risk-reward calculation is not what it was even a few years ago.’”
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