Category: Corporate Governance

Cooley Alert: Will SCOTUS’ affirmative action decision affect your company’s DEI policies?

Many questions have been raised about the direct and indirect impact of the SCOTUS decision in in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College (decided with Students for Fair Admissions, Inc. v. University of North Carolina, et al.), that using race as a factor in college admissions violates the Equal Protection Clause of the Constitution. This excellent Cooley Alert, Supreme Court’s Affirmative Action in Education Ruling Leaves Employment Diversity Initiatives Untouched—for Now, from members of Cooley’s Employment Group, provides many of the answers.

Disney decision to speak out on issue of social significance within board’s business judgment

Boards and their advisors seeking to navigate the culture wars and their often conflicting pressures from a variety of stakeholders and outside groups may find some comfort and guidance in this recent decision from the Delaware Chancery Court in Simeone v. The Walt Disney Company.  The case involved a books-and-records demand from a stockholder asserting a potential breach of fiduciary duty by Disney’s directors and officers in their determination to publicly oppose Florida’s so-called “Don’t Say Gay” bill. Originally, Disney was silent on the bill. However, following reproaches from employees and other creative partners, Disney’s board deliberated at a special meeting, and the company changed course and publicly criticized the bill.  The Court declined to grant the plaintiff’s books-and-records request, concluding that the plaintiff had not provided a credible basis from which to infer wrongdoing and thus had not “demonstrated a proper purpose to inspect books and records.” Rather, the Court concluded, the Disney board had made a business decision to reverse course—“a decision that cannot provide a credible basis to suspect potential mismanagement irrespective of its outcome.”  Under Delaware’s business judgment rule, directors have “significant discretion to guide corporate strategy—including on social and political issues.”  Importantly, the Court confirmed that, in exercising its business judgment, a board may take into account the interests of non-stockholder corporate stakeholders where those interests are “rationally related” to building long-term value.

How the S&P 500 responded to the new PVP disclosure rules

Those who want to see what the large-company mainstream is doing on comp disclosure might be interested in a recent report, Observations from S&P 500 Pay-Versus-Performance Disclosures, from comp consultant FW Cook & Co.  Cook provides analysis of how the 403 companies in the S&P 500 that filed 2023 proxy statements as of June 1, 2023, responded to the SEC’s new rule amendments on pay versus performance. 

SEC Director of Enforcement talks cyber resilience

In remarks delivered in 2022 before the Northwestern Pritzker School of Law’s Annual Securities Regulation Institute, SEC Chair Gary Gensler reminded us that “cybersecurity is a team sport,” and that the private sector is often on the front lines. (See this PubCo post.) He might have said the same thing about cyber resilience—the topic of a Financial Times summit held last month and the subject of remarks delivered to that audience by Gurbir Grewal, the current SEC Director of Enforcement. What is cyber resilience? As defined by Grewal, it’s a concept that assumes that “breaches and cyber incidents are likely going to happen, and that firms must be prepared to respond appropriately when they do. In other words, it’s not a matter of if, but when.”

ISSB releases first two sustainability reporting standards

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.”

SEC’s Investor Advisory Committee discusses audit committee overload and disclosure

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.

Commissioner Uyeda addresses shareholder proposal overload—is “private ordering” the answer?

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?

SEC posts Spring 2023 Reg-Flex Agenda—not much new but lots left to do

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.”

Cooley Alert: 9th Circuit Upholds Delaware Forum-Selection Clause

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.  

SEC approves NYSE and Nasdaq delay of timing of clawback policy compliance

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.