Category: Corporate law

What happened at the 2022 PLI Securities Regulation Institute?

At the PLI Securities Regulation Institute last week, the plethora of SEC rulemaking took some hits. It wasn’t simply the quantity of SEC rules and proposals, although that was certainly a factor.  But the SEC has issued a lot of proposals in the past. Rather, it was the difficulty and complexity of implementation of these new rules and proposals that seemed to have created the concern that affected companies may just be overwhelmed.  Former Corp Fin Director Meredith Cross, a co-chair of the program, pronounced the SEC’s climate proposal “outrageously” difficult, complicated and expensive for companies to implement, and those problems, the panel worried, would only be compounded by the adoption of expected new rules in the EU that would be applicable to many US companies and their EU subsidiaries. (See this Cooley Alert.) The panel feared that companies would be bombarded with a broad, complicated and often inconsistent series of climate/ESG disclosure mandates. Single materiality/double materiality anyone?   But it wasn’t just the proposed climate disclosure that contributed to the concern.  Recent rulemakings or proposals on stock buybacks, pay versus performance and clawbacks were also singled out as especially challenging for companies to put into effect.

If you haven’t already done so, please be sure to vote!

California’s proposed Climate Corporate Accountability Act goes belly up—for now at least

“California Approves a Wave of Aggressive New Climate Measures” was a headline in the NYT on Thursday, and that included a “record $54 billion in climate spending, a measure to prevent the state’s last nuclear power plant from closing, sharp new restrictions on oil and gas drilling and a mandate that California stop adding carbon dioxide to the atmosphere by 2045.” But one climate bill didn’t make the cut. That was SB 260, California’s Climate Corporate Accountability Act, which, on Wednesday, failed to pass in the California legislature, notwithstanding much ink being devoted to it this past year (see, e.g., this Bloomberg article). Had the bill been signed into law, it would have mandated reporting and disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities with total annual revenues in excess of a billion dollars that “do business in California.” Those requirements for GHG emissions reporting and attestation exceeded even the SEC’s proposed climate disclosure proposal.  (See this PubCo post.) And, under the existing broad definition of “doing business” in California, the bill would have captured a large number of companies, estimated to be about 5,500, including many incorporated outside of California. (Nothing new for the Golden State—see this PubCo post and this PubCo post.) According to Politico Pro, Scott Wiener, the sponsor of the legislation, said in a statement that he was “deeply disappointed in this result….If we want to avoid a full climate apocalypse, we need to understand corporate pollution—all the way down the supply chain.” He added that “he ‘won’t give up’ and that he’s ‘very likely’ to reintroduce SB 260 next year.” Time will tell.

Cooley Alert: Tax Implications of the Inflation Reduction Act

Earlier this week, the President signed into law the historic Inflation Reduction Act.  Along with important provisions regarding climate and healthcare, the IRA contains several significant tax provisions, including a 15% alternative minimum tax for corporations and a 1% excise tax on corporate stock buybacks. Want more information?  Read this Cooley Alert, Tax Implications of the Inflation Reduction Act, from our terrific Cooley Tax Department.

Have we made much progress on board racial and ethnic diversity?

After the murder of George Floyd in 2020 and the national protests that it triggered, many of the country’s largest corporations expressed solidarity and pledged support for racial justice and racial and ethnic diversity, equity and inclusion. Some institutional investors also beefed up their proxy voting policies, demanding both greater transparency and more racial and ethnic diversity. One place that companies looked to implement their commitments to DEI was at the board level. Now, about two years after that horrific event, how much progress have companies made? Using the end of proxy season in 2020 as a starting point, ISS has some recent data. ISS concludes that, while substantial progress has been made in board racial and ethnic diversity, “many boards still do not reflect the diversity of their customer base or the demographics of the broader society in which they operate.”

California appellate court upholds enforceability of exclusive federal forum provision

In Salzberg v. Sciabacucchi (pronounced Shabacookie), the Delaware Supreme Court unanimously held that charter provisions designating the federal courts as the exclusive forum for ’33 Act claims were “facially valid.” (See this PubCo post.) Given that Sciabacucchi involved a facial challenge, the Supreme Court had viewed the question of enforceability as a “separate, subsequent analysis” that depended “on the manner in which it was adopted and the circumstances under which it [is] invoked.” With regard to the question of enforceability of exclusive federal forum provisions if challenged in the courts of other states, the Delaware Supreme Court said that there were “persuasive arguments,” such as due process and the need for uniformity and predictability, that “could be made to our sister states that a provision in a Delaware corporation’s certificate of incorporation requiring Section 11 claims to be brought in a federal court does not offend principles of horizontal sovereignty,” and should be enforced. But would they be? Following Sciabacucchi, in light of the perceived benefits for defendants of litigating Securities Act claims in federal court, many Delaware companies that did not have FFPs adopted them, and companies with FFPs involved in ’33 Act litigation tried to enforce them by moving to dismiss state court actions. In 2020, in an apparent case of first impression, Wong v. Restoration Robotics, the San Mateo Superior Court in California upheld application of the FFP, declining “jurisdiction over the claims alleged against Restoration Robotics and its officers and directors only, pursuant to the FFP.” (See this PubCo post.) Plaintiff appealed.  The California Court of Appeal, First Appellate District, has just affirmed the lower court’s decision, upholding enforcement of the FFP.

Delaware bar recommends DGCL amendments, including officer exculpation charter provisions

The Council of the Corporation Law Section of the Delaware State Bar Association has provided recommendations to the Delaware General Assembly for a number of changes to the Delaware General Corporation Law, some of them significant, such as an amendment authorizing charter provisions that would eliminate the personal liability of specified officers for breaches of the duty of care—basically, an extension of DGCL Section 102(b)(7). Typically, the Delaware legislature follows the Council’s recommendations.  If adopted and signed into law, the amendments would become effective on August 1, 2022, and generally would apply to actions taken on or after August 1. Several of the recommended changes are discussed below.

Board diversity statute for “underrepresented communities” held unconstitutional under California’s equal protection provisions

On April 1, the L.A. County Superior Court granted the plaintiffs’ motion for summary judgment in Crest v. Padilla, the taxpayer litigation challenging AB 979, California’s board diversity statute for “underrepresented communities.”  (See this PubCo post.)   Unfortunately, at the time, only a minute order was released, which did not offer any explanation of the Court’s reasoning.  Now, a new 24-page Court Order, which provides the Court’s reasoning, has been made available, and, in it, the Court concludes that the statute, Corporations Code § 301.4, violates the equal protection clause of the California Constitution on its face. Why? Because, in the Court’s view, § 301.4 treats similarly situated individuals differently based on suspect racial and other categories that are not justified by a compelling interest, nor is the statute narrowly tailored to address the interests identified. Will this case have a spillover effect on the decision currently pending of plaintiffs’ taxpayer challenge to California’s board gender diversity statute, SB 826? According to Reuters, the California State Senator who authored SB 826 said that “the case involved a ‘very different set of facts and distinctly different legal issues.’”

Court grants summary judgment to plaintiffs challenging California’s board diversity statute for “underrepresented communities”

As you may recall, SB 826, the California board gender diversity statute, is not the only California board diversity statute facing legal challenges.  In 2020, AB 979, California’s board diversity statute for “underrepresented communities,” patterned after the board gender diversity statute, was signed into law, and it too has been facing legal challenges—in fact litigation brought by the same plaintiffs on the same legal basis. (See this PubCo post.) Framed as a “taxpayer suit” much like Crest v. Padilla I, the sequel, Crest v. Padilla II, sought to enjoin Alex Padilla, the then-California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law and a judgment declaring the diversity mandate to be unlawful in violation of the California constitution.  As Crest v. Padilla I is awaiting a court decision following a bench trial (see this PubCo post), what’s happening in the sequel? After a hearing on motions by both parties for summary judgment in March, the Los Angeles Superior Court took the matter under submission and, on April Fool’s Day, the Court issued its order.  But it was no joke—the Court granted plaintiff’s motion for summary judgment.  The state has not yet indicated whether it will appeal the decision. In a statement, the president of Judicial Watch, which represented the plaintiffs, said that “[t]his historic California court decision declared unconstitutional one of the most blatant and significant attacks in the modern era on constitutional prohibitions against discrimination.”

Are staggered boards ever good for shareholders?

In the folklore of corporate governance, is there a governance structure that is more anathema to corporate governance mavens and shareholder democracy activists than the staggered board? (Ok, that’s an exaggeration, but you get my point.)  Proxy advisory firms and activists oppose them, institutional investors vote against them and shareholders proposals to eliminate them are unusually successful.  Staggered boards, where subsets of board members are elected in separate classes every three years—and therefore cannot be easily or quickly voted out—are often viewed as the archetypal technique to prevent hostile takeovers.  Opponents also argue that staggered boards entrench boards and managements by insulating them from the shareholders and making it tough for shareholders to dethrone the CEO. That has to be bad for the company, right? Not so fast, says this study co-authored by a professor at Stanford Graduate School of Business and Stanford Law School. According to the author, quoted in Insights by Stanford Business, “[f]rom Adam Smith on, the concern of corporate governance has been how to mind the managers….Corporate governance has been about building up checks and monitors on the managers. The idea is that if we can fire them, and they know we can fire them, then maybe they will do the right thing.”  But for some companies—in this case, early-life-cycle technology companies facing more Wall Street scrutiny—the evidence showed that, by allowing managers to focus on long-term—perhaps bolder and riskier—investments and innovations, staggered boards can actually be a benefit.

Delaware expected to allow captive insurance for D&O coverage

Recent legislation expected to be signed into law by Delaware’s governor amends the state’s General Corporation Law to expressly allow the use of captive insurance companies to fund a Delaware corporation’s directors and officers insurance coverage. What are the implications?