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 are “facially valid.” (See this PubCo post.) Given that Sciabacucchi involved a facial challenge, the 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 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, many Delaware companies that did not have FFPs adopted them, and companies with FFPs involved in current ’33 Act litigation tried to enforce them by moving to dismiss state court actions. One such case is currently being fought in California state court involving ’33 Act claims against Dropbox, and, as noted in this column in Reuters, a group of former Delaware jurists and a former SEC Commissioner have filed an amicus brief in support of the company’s effort to enforce the FFP in that case.
Although it may seem like the last millennium, it was only in January of this year that the CEO of BlackRock, Laurence Fink, in his annual letter to CEOs, announced a number of initiatives designed to put “sustainability at the center of [BlackRock’s] investment approach.” (See this PubCo post.) According to Fink’s letter, “[c]limate change has become a defining factor in companies’ long-term prospects.” Although he had seen many financial crises over the course of his long career, in the broad scheme of things, they were all ultimately relatively short-term in nature. Not so with climate change: “Even if only a fraction of the projected impacts is realized, this is a much more structural, long-term crisis.” And investors are now “recognizing that climate risk is investment risk,” making climate change the topic that clients raised most often with BlackRock. To that end, BlackRock announced a number of new initiatives, among them “strengthening our commitment to sustainability and transparency in our investment stewardship activities.” As part of that initiative, BlackRock said that it would hold companies accountable if they failed to make sufficient progress. That position came in the face of press reports, like this one in the NYT, highlighting what appeared to be stark inconsistencies between the BlackRock’s advocacy positions and its proxy voting record, protests outside of its offices by climate activists, letters from Senators and charges of greenwashing. So what has been the result? BlackRock has just published a report describing its investment stewardship actions taken during 2020 in connection with climate and other sustainability issues. Given that BlackRock is the largest asset manager, companies may want to take note.
Will companies accede to calls for actions to improve racial and ethnic diversity in hiring and promotion? California considers a new mandate for racial/ethnic board diversity
In this excellent NYT article from early June, the author painfully explores the view of many African-American executives that, notwithstanding the public condemnations of racism by many public companies and the “multimillion-dollar pledges to anti-discrimination efforts and programs to support black businesses,” still, many of these companies “have contributed to systemic inequality, targeted the black community with unhealthy products and services, and failed to hire, promote and fairly compensate black men and women. ‘Corporate America has failed black America,” said [the African-American president of the Ford Foundation]. ‘Even after a generation of Ivy League educations and extraordinary talented African-Americans going into corporate America, we seem to have hit a wall.’” In the article, a number of Black executives offer recommendations for actions companies should take to begin to implement the needed systemic transformation. And now, third parties—from proxy advisors to institutional investors to legislators—are taking steps to induce companies to take some of these actions. Will they make a difference?
As you know, there has been a fairly sustained clamor for the SEC to impose a requirement for climate change and sustainability disclosure. For example, in May, the SEC’s Investor Advisory Committee recommended that the SEC “set the framework” for issuers to report on material environmental, social and governance information, concluding that “the time has come for the SEC to address this issue.” (See this PubCo post.) However, SEC Chair Jay Clayton and others at the SEC have been fairly vocal about their reluctance to impose a prescriptive sustainability disclosure requirement beyond principles-based materiality. But what about a narrower request? A mandate for just a single piece of information? This rulemaking petition filed by Impax Asset Management LLC, investment adviser to Pax World Funds, a “specialist asset manager investing in the transition to a more sustainable economy,” requests that the SEC “require that companies identify the specific locations of their significant assets, so that investors, analysts and financial markets can do a better job assessing the physical risks companies face related to climate change.”
With so much going on in connection with COVID-19 and its impact, it would be easy to overlook the rest of the SEC’s agenda. And it’s a lengthy one. The new Spring Regulatory Flexibility Act Agenda was published at the end of June, so it’s time to look at what’s on deck for the SEC in the coming year or so. (That reference to “on deck” may be the only sports anyone gets this year….) SEC Chair Jay Clayton has repeatedly made clear his intent to make the RegFlex Agenda more realistic, streamlining it to show what the SEC actually expects to take up in the subsequent period. (Clayton has previously said that the short-term agenda signifies rulemakings that the SEC actually planned to pursue in the following 12 months. See this PubCo post and this PubCo post.) The SEC’s Spring 2020 short-term and long-term agendas reflect the Chair’s priorities as of March 31, when the agenda was compiled. What stands out here are the matters that have, somewhat surprisingly, moved up onto the final-rule-stage agenda—think universal proxy—from perpetual residence on the long-term (i.e., the maybe never) agenda.
In mid-June, a large group of nonprofits, socially responsible investors, labor unions and others submitted a letter to SEC Chair Jay Clayton, stating that, while the guidance related to COVID-19 disclosure that he and Corp Fin Director Bill Hinman provided in April exhorting companies “to provide as much information as practicable” was a “step in the right direction” (see this PubCo post), it really did not go far enough in mandating the necessary transparency. They urged the SEC to impose new requirements for disclosure about how “companies are acting to protect workers, prevent the spread of the virus, and responsibly use any federal aid they receive.” With the SEC’s current propensity for principles-based disclosure, will it be persuaded to adopt these mandates?
In early April, the SEC approved and declared immediately effective an NYSE rule change to waive, through June 30, 2020 and subject to compliance with conditions, application of certain of the shareholder approval requirements in Section 312.03 of the NYSE Listed Company Manual. The waiver was designed to address the concern that, as a result of the impact of COVID-19, many listed companies with urgent liquidity needs had to access additional capital from insiders, but the NYSE’s shareholder approval requirements could have created impediments to quickly satisfying those capital needs. Since the implementation of the original waiver in April, the NYSE notes, “a number of listed companies have completed capital raising transactions that would not have been possible without the flexibility provided by the Waiver.” While equity markets have generally recovered from their initial precipitous declines, the NYSE observes, many listed companies are continuing to experience difficulty. Accordingly, the NYSE has now proposed to extend this temporary relief through September 30, 2020, and the SEC has declared the proposal immediately effective.
Tuesday afternoon, SEC Chair Jay Clayton moderated a virtual roundtable, with Corp Fin Director Bill Hinman alongside, to hear how investors viewed current disclosure in connection with COVID-19 and, given that Q2 reporting is around the corner, what they would like to see. Participants on the panel included Gary Cohn, Former Director of the National Economic Council; Glenn Hutchins, Chair of North Island; Tracy Maitland, President and CIO of Advent Capital; and Barbara Novick, Vice Chair and Co-Founder of BlackRock. While it was entirely predictable that forward-looking information about liquidity would be a key concern, the call by all the participating investors for disclosure about social issues—particularly human capital and diversity—was something of a revelation.
It’s well known that COVID-19 provided an unanticipated shock to the economy as a consequence of what economist Paul Krugman termed the “economic equivalent of a medically induced coma.” As a result, many companies were compelled to disclose historic performance that was, to put it mildly, at odds with their expectations of a few months prior, with little insight about the shape of future performance. In this paper, The Spread of COVID-19 Disclosure, from the Corporate Governance Research Initiative at the Stanford Graduate School of Business and the Rock Center for Corporate Governance at Stanford University, the authors looked at how companies responded to this situation, examining the levels of transparency that companies provided in the “widely uncertain” setting of COVID-19.
In late November last year, the NYSE filed with the SEC a proposed rule change that would have allowed companies going public to raise capital through a primary direct listing. Under current NYSE rules, only secondary sales are permitted in a direct listing. As a result, thus far, companies that have embarked on direct listings have looked more like well-heeled unicorns, where the company was not necessarily in need of additional capital. The new proposal seemed to be a potential game changer for the traditional underwritten IPO. (See this PubCo post.) However, as reported by CNBC and Reuters, a little over a week later, the SEC rejected the NYSE’s proposal, and it was removed from the NYSE website, causing a lot of speculation about the nature of the SEC’s objection and whether the proposal could be resurrected. At the time, an NYSE spokesperson confirmed to CNBC that the proposal had been rejected, but said that the NYSE remained “‘committed to evolving the direct listing product…This sort of action is not unusual in the filing process and we will continue to work with the SEC on this initiative.’” (See this PubCo post.) The NYSE did persevere, and the proposal was refiled in December with some clarifications and corrections. But then—silence. In January and February, the NYSE had four meetings with SEC staff, including folks in Chair Clayton’s office, presumably to make the case for the proposal. A number of public comment letters, of divided opinion, were submitted. Apparently, the SEC remained unconvinced, designating a longer period to decide, and then in late March, issued an Order instituting proceedings to determine whether to approve or disapprove the proposed rule change. Undaunted, the NYSE is giving it another go and has just filed Amendment No. 2. Will it be enough to convince the SEC?