Category: Corporate Governance
What does the Nasdaq board diversity data tell us?
As you know, the Nasdaq board diversity disclosure requirements might be in jeopardy at the moment, as we await the decision of the en banc Fifth Circuit following oral argument in Alliance for Fair Board Recruitment and National Center for Public Policy Research v. SEC. As noted in this PubCo post, the discussion at oral argument seemed to be dominated by rule skeptics. Notwithstanding the possibility that the rules might be overturned—or perhaps because they might be—the folks at Bloomberg Law have used the opportunity to analyze some of the data from those disclosures, offering a glimpse into the current state of corporate board diversity among the over 4,000 Nasdaq-listed companies. What is the bottom line? The authors found that “companies have diversified their boards in part by predominantly hiring white women—meeting the rule’s gender-based requirements—but falling short when it comes to other demographics.”
Chancellor McCormick, law professors weigh in on controversy over proposed DGCL amendments
Last month, this PubCo post discussed the recent controversy over proposed amendments to the Delaware General Corporation Law. As noted in the post, the Council of the Corporation Law Section of the Delaware State Bar Association proposes amendments annually, but some of the amendments proposed this year, submitted as Senate Bill 313 to the Delaware General Assembly, have elicited a substantial amount of pushback. The controversy has revolved largely around proposed amendments designed to address the outcome of the decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, which many practitioners viewed as inconsistent with current market practice. Then, a letter on this topic, dated April 12, surfaced (hat tip to Law 360) from Delaware Chancellor Kathaleen McCormick to the Delaware State Bar Committee. Adding even more fuel to the fire is a letter submitted to the Delaware legislature, just posted on the Harvard Law School Forum on Corporate Governance, by a group of over 50 law professors in opposition to the amendments.
What happened with no-action requests this proxy season?
According to “SEC No Action Statistics to May 1, 2024” from the Shareholder Rights Group, this proxy season, the SEC staff “has nearly doubled the number of exclusions” of shareholder proposals compared with 2023; that is, relative to the prior year, the staff has issued almost twice the number of letters indicating that it would not recommend enforcement action if the company excluded the proposal from its proxy statement. While that surge reflects primarily a “sharp increase” in the number of requests for no-action filed by companies, importantly, the article indicates that it also reflects an increase in the relative proportion of no-action requests granted. From November 1, 2023 to May 1, 2024, the article reports, the SEC has granted company requests for no-action regarding shareholder proposals about 68% of the time (excluding requests withdrawn), compared with 56% at the same point last year. Notably, the article reports, that percentage (68%) is fairly comparable to the average exclusion rate (69%) during the prior administration (2017 to 2020). Since the issuance of SLB 14L in 2021, the staff has come in for criticism for applying a revised approach to evaluating no-action requests that some market participants considered perhaps a bit too generous to proponents of proposals, leading to an excess of overly prescriptive proposals presented at shareholder meetings. As the article suggests, has this criticism led to a moderation of that approach?
Surprising pushback on Delaware proposed amendments
Recently, the Council of the Corporation Law Section of the Delaware State Bar Association proposed some amendments to the Delaware General Corporation Law, as they do with some regularity. (See this Alert from the Delaware firm, Morris Nichols Arsht & Tunnell.) As the Alert indicated, some of the proposed new amendments were designed to address the effects of recent Delaware cases highlighting “that the legal requirements identified in the cases were not necessarily in line with market practice. The Amendments are designed to bring existing law in line with such practice.” According to Law 360 (here and here), the proposed amendments have just been submitted as Senate Bill 313 to the Delaware General Assembly for its consideration and approval. There’s not usually much controversy surrounding these proposed amendments. Not so this time. This year, there has been a surprising amount of pushback on these proposed amendments—or at least on one of them.
Nasdaq proposes rule changes related to phase-ins and cure periods
Nasdaq has proposed to modify some of its corporate governance rules—specifically Rules 5605, 5615 and 5810—to modify the phase-in schedules for the independent director and committee requirements in connection with IPOs, spin-offs and carve-outs, bankruptcy and other specified circumstances and to clarify the applicability of certain cure periods.
Professor Coffee tackles the “shadow trading” theory
Here is a great article—no surprise considering its author, Columbia Law Professor John Coffee—that practically gives the last rites to the “shadow trading” theory recently accepted by a federal district court (see this PubCo post) and a jury (see this PubCo post) in SEC v. Panuwat. If, that is, the theory ever reaches the Supreme Court. In Panuwat, the jury in a federal district court in California determined that Matthew Panuwat was civilly liable for insider trading on a set of highly unusual facts under the misappropriation theory—misappropriation of confidential information used to trade in securities in breach of a duty to the source of the information. According to Coffee, prior to Panuwat, cases involving the misappropriation theory “seem to have involved conduct by the defendant that caused ‘likely harm’ to the shareholders of the source of the information.” But not so in Panuwat. Rather than a fiduciary obligation, he suggests, perhaps the duty that Panuwat breached was really a contractual duty owed to his employer? And, in that case, should the SEC be the party enforcing it? His arguments may be highly controversial—certainly the SEC would disagree—but thought-provoking nonetheless and definitely worth a read.
SEC Chief Accountant issues statement on tone at the top
In this statement, SEC Chief Accountant Paul Munter discusses the importance of setting the tone at the top. According to Munter, “academic research has ‘long stressed the crucial role that tone at the top, set by leadership, plays in influencing firm culture and how it is ultimately reflected in the actions and behaviors of [auditors].’ The tone at the top of an audit firm determines whether the culture is focused on delivering high-quality audits or is a profit-center chasing the short-term bottom line, and whether ‘top management extols the important role audits play in the capital markets’ or acts as if audits are little more than compliance ‘commodities.’” Although he talks in terms of auditors, some of Munter’s recommendations may prove useful for companies in establishing their own ethics environments and tone at the top.
Dubious en banc Fifth Circuit hears oral argument on Nasdaq board diversity rules
In August 2021, the SEC approved a Nasdaq proposal for new listing rules regarding board diversity and disclosure, accompanied by a proposal to provide free access to a board recruiting service. The new listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. (See this PubCo post.) It didn’t take long for a court challenge to these rules to materialize: the Alliance for Fair Board Recruitment and, later, the National Center for Public Policy Research petitioned the Fifth Circuit Court of Appeals—the Alliance has its principal place of business in Texas—for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post and this PubCo post) In October 2023, a three-judge panel of the Fifth Circuit denied those petitions, in effect upholding Nasdaq’s board diversity listing rules. Given that, by repute, the Fifth Circuit is the circuit of choice for advocates of conservative causes, the decision to deny the petition may have taken some by surprise—unless, that is, they were aware, as discussed in the WSJ and Reuters, that the three judges on this panel happened to all be appointed by Democrats. Petitioners then filed a petition requesting a rehearing en banc by the Fifth Circuit, where Republican presidents have appointed 12 of the 16 active judges. (See this PubCo post.) Not that politics has anything to do with it, of course. That petition for rehearing en banc was granted, vacating the opinion of the lower court. Yesterday, oral argument was heard. Let’s just say that, while some points were made in support of the rule, the discussion seemed to be dominated by rule skeptics. But the feud between Drake and Kendrick Lamar did figure in the discussion. Some highlights below.
Cooley Alert: EU Adopts Mandatory Rules on Corporate Sustainability Due Diligence
In late April, the European Parliament voted to adopt the Corporate Sustainability Due Diligence Directive, which will apply to EU companies and to non-EU companies with activities in the EU that meet specified thresholds. A discussed in this new Cooley Alert, EU Adopts Mandatory Rules on Corporate Sustainability Due Diligence That Will Apply to Many US Companies, from Cooley’s International ESG and Sustainability Advisory team, the CSDDD could turn out to be a “heavy lift” for many in-scope companies: the new law will mandate, for the first time, comprehensive “human rights and environmental due diligence obligations, with significant financial penalties and civil liability for companies that do not fully comply,” as well as new requirements for companies “to adopt and put into effect a climate transition plan” and “to report on their due diligence processes.” As the Alert observes, these requirements “reframe existing international soft laws”—UN Guiding Principles and OECD guidelines—as “mandatory obligations.”
Is ESG a “must have” only in boom-times?
Not so long ago, zeal for corporate action on ESG was skyrocketing. Now? Not so much. What happened? Many have attributed the decline in appetite for ESG to the politicization of ESG and particularly to ESG backlash. This paper from the Rock Center for Corporate governance at Stanford has another idea. Has “ESG enthusiasm” reached its expiration date or, as the paper posits, is it like an alligator Birkin bag, just a luxury—something to pursue only when you’re “feeling flush”? In economics, the authors explain, demand for most items declines as prices increase. Not so with luxury goods, where “a high price tag stimulates demand in part because of the social benefits the purchaser receives by signaling to others their ability to afford it.” Demand for luxury goods often rises and falls with the economy; when times are prosperous, demand for luxury goods increases and when money is tight, demand falls. In that light, a “case can be made,” the authors contend, “that ESG is a luxury good.”
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