Category: Corporate Governance
Would “reframing” ESG restore its appeal?
In this Comment from a Reuters magazine, the author attempts to rescue the underlying environmental, social and governance principles from the often disparaged term, “ESG.” ESG, he observes, was “[o]riginally conceived as a financial tool to frame how corporations disclose their impact and investment,” but has now become a term that is “fraught with debate, lacks a clear definition and is often misunderstood.” However, he contends, people actually associate many of the values and concepts underlying ESG with business success. Perhaps the term should be retired, he suggests, in favor of something less freighted. “Responsible business” might do the trick—especially “responsible business” that correlates with positive corporate performance.
SEC’s Spring 2024 agenda delays most actions until 2025
As reported by Bloomberglaw.com, during an interview in February on “Balance of Power” on Bloomberg Television, SEC Chair Gary Gensler said that he does not intend to “rush” the SEC’s agenda “to get ahead of possible political changes in Washington,” that is, in anticipation of the November elections. According to Bloomberg, Gensler insisted that he’s “‘not doing this against the clock….It’s about getting it right and allowing staff to work their part.’” The SEC has just posted the new Spring 2024 Agenda and, looking at the target dates indicated on the agenda, it appears that Gensler is a man true to his word. The only new item (relevant to our interests here) slated for possible adoption this year is a distinctly apolitical proposal about EDGAR Filer Access and Account Management. And, while a few proposals are targeted for launch (or relaunch) this year—two related to financial institutions and, notably, a proposal for human capital disclosure—most are also put off until April next year—post-election, that is, when the agenda might look entirely different. (Of course, the SEC sometimes acts well in advance of the target.) According to the SEC’s preamble, the items listed in the Regulatory Flexibility Agenda for Spring 2024 “reflect only the priorities of the Chair.” In addition, information on the agenda was accurate as of May 1, 2024, the date on which the SEC staff completed compilation of the data. In his statement on the agenda, Gensler said that “[i]n every generation since the SEC’s founding 90 years ago, our Commission has updated rules to meet the markets and technologies of the times. We work to promote the efficiency, integrity, and resiliency of the markets. We do so to ensure the markets work for investors and issuers alike, not the other way around. We benefit in all of our work from robust public input regarding proposed rule changes.”
Reverse split to regain bid price compliance? It may be more complicated than you think
Nasdaq has filed with the SEC a proposed rule change to “modify the application of the bid price compliance periods where a company takes action that causes non-compliance with another listing requirement.” Hmmm, how’s that again? This proposed rule change is designed to address instances where, to regain compliance with the minimum bid price required by Exchange listing rules, a listed company implements a reverse stock split; however, while the reverse split may bring the company into compliance with the minimum bid price requirement, it may also, at the same time, lead to non-compliance with another listing rule—particularly, the requirements for the number of public holders and number of publicly held shares (depending on treatment of fractional shares), triggering a new deficiency process with a new time period within which the company is permitted to seek to regain compliance. That’s excessive, Nasdaq says, and too confusing for investors, possibly adversely affecting investor confidence in the market. Because Nasdaq believes it is inappropriate for a company to receive additional time to cure non-compliance with the newly violated listing standard, it is seeking, with this proposed amendment, to eliminate the additional compliance period that would otherwise result from the newly created deficiency. Under the proposal, in the event a reverse split to achieve bid-price compliance leads to other non-compliance, the company would be deemed non-compliant with the bid price requirement until both the new deficiency (e.g., number of holders or number of publicly held shares) is cured and the company thereafter maintains a $1.00 bid price for a minimum of 10 consecutive business days. If the proposal is adopted, companies will need to carefully calculate the potential impact of a reverse split on other listing requirements to avoid these consequences where possible.
SEC charges RR Donnelley with control failures related to cybersecurity incident
In this June Order, SEC Enforcement brought settled charges against R.R. Donnelley & Sons, a “global provider of business communications services and marketing solutions,” for control failures: more specifically, a failure to maintain adequate disclosure controls and procedures related to cybersecurity incidents and alerts and a failure to devise and maintain adequate internal accounting controls—more specifically, “a system of cybersecurity-related internal accounting controls sufficient to provide reasonable assurances that access to RRD’s assets—its information technology systems and networks, which contained sensitive business and client data—was permitted only with management’s authorization.” RRD agreed to pay over $2.1 million to settle the charges. Interestingly, in a Statement, SEC Commissioners Hester Peirce and Mark Uyeda decried the SEC’s use of “Section 13(b)(2)(B)’s internal accounting controls provision as a Swiss Army Statute to compel issuers to adopt policies and procedures the Commission believes prudent,” not to mention its “decision to stretch the law to punish a company that was the victim of a cyberattack.”
Delaware SB 313, controversial proposed corporate law amendments, heads to Governor for signature
What’s the latest on SB 313, the proposed amendments to the Delaware General Corporation Law largely designed to address the outcome of the decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company? That case invalidated portions of a stockholder agreement relinquishing to a founding stockholder control over certain corporate governance matters, a decision that many practitioners viewed as inconsistent with current market practice. The proposed amendments in SB 313 would add a new subsection (18) to Section 122 of the DGCL to allow corporations to enter into the types of stockholder contracts at issue in Moelis, even if the provisions are not set forth in a certificate of incorporation. As discussed in this PubCo post and this PubCo post, those proposed amendments have turned out to be highly contentious: a number of academics and jurists, including Delaware Chancellor Kathaleen McCormick in a seven-page letter to the Delaware State Bar Committee, raised objections to the haste and timing (prior to adjudication of an appeal by the Delaware Supreme Court) of the legislation. And Law360 reports that posts by Vice Chancellor Travis Laster (purportedly not acting as vice chancellor) questioned “S.B. 313’s terms” and contended that “[c]laims by critics that the Moelis decision put thousands of agreements at risk, the vice chancellor wrote, ‘smacks of hyperbole.’” Adding even more fuel to the fire was a letter submitted to the Delaware legislature, posted on the Harvard Law School Forum on Corporate Governance, by a group of over 50 law professors in opposition to the amendments, along with these separate posts by noted academics on the HLS Forum and on the CLS Blue Sky blog, with this lonely post in favor. But the bill then “sailed through” the Delaware Senate “without debate or an opposing vote,” on to the Delaware House. (See this PubCo post.) The bill has now passed the House and been forwarded to the Governor for signature—but not without some acrimony.
Controversial Delaware legislation breezes through Delaware Senate
Controversy notwithstanding, the proposed amendments to the Delaware General Corporation Law in Senate Bill 313 have reportedly “sailed through” the Delaware Senate and are scheduled to move to the Delaware House this week. (See, e.g., this article in Bloomberg.) The proposed amendments were largely designed to address the outcome of the decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, which invalidated portions of a stockholder agreement relinquishing to a founding stockholder control over certain corporate governance matters, a decision that many practitioners viewed as inconsistent with current market practice. But, as discussed in this PubCo post, those proposed amendments have turned out to be highly contentious: a number of academics and jurists, including Delaware Chancellor Kathaleen McCormick in a seven-page letter to the Delaware State Bar Committee, raised objections to the haste and timing (prior to adjudication of an appeal by the Delaware Supreme Court) of the legislation. Adding even more fuel to the fire was a letter submitted to the Delaware legislature, posted on the Harvard Law School Forum on Corporate Governance, by a group of over 50 law professors in opposition to the amendments, along with these separate posts by noted academics on the HLS Forum and on the CLS Blue Sky blog, with this lonely post in favor. (See this PubCo post.)
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?
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