Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

Akorn, Inc., v. Fresenius Kabi AG et al will undoubtedly become known as the first case where a Delaware court found a material adverse effect, or MAC (often referred to as a material adverse effect, or MAE), to exist.  The opinion also contains a helpful description of a description of “commercially reasonable efforts” as compared to other efforts based clauses.

Efforts based clauses mitigate the rule of strict liability for contractual non-performance that otherwise governs. The Court noted that generally if a party agrees to do something, he must do it or be liable for resulting damages (or potentially be subject to an order compelling specific performance).   At times, however, a party’s ability to perform its obligations depends on others or may be hindered by events beyond the party’s control.  In those situations, drafters commonly add an efforts clause to define the level of effort that the party must deploy to attempt to achieve the outcome. The language specifies how hard the parties have to try.

Describing how many deal lawyers think, the Court cited the ABA Committee on Mergers and Acquisitions which ascribed the following meanings to commonly used standards:

  • Best efforts: the highest standard, requiring a party to do essentially everything in its power to fulfill its obligation (for example, by expending significant amounts or management time to obtain consents).
  • Reasonable best efforts: somewhat lesser standard, but still may require substantial efforts from a party.
  • Reasonable efforts: still weaker standard, not requiring any action beyond what is typical under the circumstances.
  • Commercially reasonable efforts: not requiring a party to take any action that would be commercially detrimental, including the expenditure of material unanticipated amounts or management time.
  • Good faith efforts: the lowest standard, which requires honesty in fact and the observance of reasonable commercial standards of fair dealing. Good faith efforts are implied as a matter of law.

The Court noted that commentators who have surveyed the case law find little support for the distinctions that transactional lawyers draw.  Consistent with this view, in Williams Companies v. Energy Transfer Equity, L.P., the Delaware Supreme Court interpreted a transaction agreement that used both “commercially reasonable efforts” and “reasonable best efforts.” Referring to both provisions, the high court stated that “covenants like the ones involved here impose obligations to take all reasonable steps to solve problems and consummate the transaction.” The high court did not distinguish between the two.

The Court also discussed that while serving as a member of the Court of Chancery, Chief Justice Strine similarly observed that even a “best efforts” obligation “is implicitly qualified by a reasonableness test—it cannot mean everything possible under the sun.” Another Court of Chancery decision—Hexion—also framed a buyer’s obligation to use its “reasonable best efforts” to obtain financing in terms of commercial reasonableness: “[T]o the extent that an act was both commercially reasonable and advisable to enhance the likelihood of consummation of the financing, the onus was on Hexion to take that act.”

 

 

The U.S. Department of the Treasury, as chair of the Committee on Foreign Investment in the United States (CFIUS), today issued temporary regulations in connection with the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which President Trump signed into law in August.  FiRRMA is meant to protect critical American technology and intellectual property from potentially harmful foreign acquisitions.

FIRRMA authorizes CFIUS to conduct pilot programs to implement provisions in the legislation that did not become effective immediately upon enactment.  Full implementation of FIRRMA will occur no later than February 2020.

The pilot program implements authorities that expand the scope of transactions subject to CFIUS review to include certain non-controlling investments in U.S. businesses involved in critical technologies related to specific industries.  The pilot program also makes effective FIRRMA’s mandatory declarations provision for transactions that fall within the scope of the pilot program.  The pilot program will end no later than the date on which the final FIRRMA regulations are fully implemented.

In addition to the pilot program, Treasury issued temporary regulations that make limited updates to CFIUS’s existing regulations, primarily to implement provisions of FIRRMA that became immediately effective upon its enactment.  This will ensure consistency between CFIUS’s regulations and the statute.  These regulations are effective October 11, 2018.

In accordance with FIRRMA, the pilot program will commence on November 10, 2018, 30 days following publication of the regulations in the Federal Register.

For more information see Treasury’s fact sheet and text of the regulations (pilot program regulations and updates to existing regulations).

Akorn, Inc., v. Fresenius Kabi AG et al will undoubtedly become known as the first case where a Delaware court found a material adverse effect, or MAC (often referred to as a material adverse effect, or MAE), to exist. The opinion also contains a helpful description of how to read an MAE clause. MAE clauses often contain a litany of exceptions of seemingly unrelated matters, and the opinion brings some order to the analysis.

According to the Delaware Court of Chancery, in any M&A transaction, a significant deterioration in the selling company’s business between signing and closing may threaten the fundamentals of the deal. Merger agreements typically address this problem through complex and highly-negotiated ‘material adverse change’ or ‘MAC’ clauses, which provide that, if a party has suffered a MAC within the meaning of the agreement, the counterparty can costlessly cancel the deal.

The Court observed that despite the attention that contracting parties give to these provisions, MAC clauses typically do not define what is “material.” Commentators have argued that parties find it efficient to leave the term undefined because the resulting uncertainty generates productive opportunities for renegotiation.

Rather than devoting resources to defining more specific tests for materiality, The Court noted the current practice is for parties to negotiate exceptions and exclusions from exceptions that allocate categories of MAE risk. The typical MAE clause allocates general market or industry risk to the buyer, and company-specific risks to the seller. From a drafting perspective, the MAE provision accomplishes this by placing the general risk of an MAEon the seller, then using exceptions to reallocate specific categories of risk to the buyer.

Exclusions from the exceptions therefore return risks to the seller. A standard exclusion from the buyer’s acceptance of general market or industry risk returns the risk to the seller when the seller’s business is uniquely affected. To accomplish the reallocation, the relevant exceptions are qualified by a concept of disproportionate effect. For example, a buyer might revise the carve-out relating to industry conditions to exclude changes that disproportionately affect the target as compared to other companies in the industries in which such target operates.

The Court pointed out a more nuanced analysis of the types of issues addressed by MAE provisions reveals four categories of risk: systematic risks, indicator risks, agreement risks, and business risks.

  • Systematic risks are “beyond the control of all parties (even though one or both parties may be able to take steps to cushion the effects of such risks) and . . . will generally affect firms beyond the parties to the transaction.”
  • Indicator risks signal that an MAE may have occurred. For example, a drop in the seller’s stock price, a credit rating downgrade, or a failure to meet a financial projection is not itself an adverse change, but rather evidence of such a change.
  • Agreement risks include all risks arising from the public announcement of the merger agreement and the taking of actions contemplated thereunder by the parties. Agreement risks include endogenous risks related to the cost of getting from signing to closing, e.g., potential employee flight.
  • Business risks are those “arising from the ordinary operations of the party’s business (other than systematic risks), and over such risks the party itself usually has significant control. The most obvious business risks are those associated with the ordinary business operations of the party—the kinds of negative events that, in the ordinary course of operating the business, can be expected to occur from time to time, including those that, although known, are remote.

According to the Court, generally speaking, the seller retains the business risk. The buyer assumes the other risks.

The SEC has approved an amendment to Nasdaq Rule 5635(d) to modify the circumstances in which shareholder approval is required for issuances of securities in private placement transactions.

The revised rule provides shareholder approval is required prior to a 20% Issuance at a price that is less than the Minimum Price.  A “20% Issuance”, for purposes of Rule5635(d), is defined as a transaction, other than a public offering as defined in IM-5635-3, involving the sale, issuance, or potential issuance by the issuer of common stock (or securities convertible into or exercisable for common stock), which, alone or together with sales by officers, directors, or substantial shareholders of the issuer, equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance.

The definition combines the existing provisions of Nasdaq Rule 5635(d)(1) and (d)(2) into one provision. According to NASDAQ, this revision does not make any substantive change to the threshold for quantity or voting power of shares being sold that would give rise to the need for shareholder approval, although the applicable pricing test has changed.

“Minimum Price,” is defined as the price that is the lower of (1) the closing price (as reflected on Nasdaq.com) immediately preceding the signing of the binding agreement or (2) the average closing price of the common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the binding agreement.

The revised rule no longer includes a requirement that the price exceed the book value of the common stock.

In perhaps the fastest moving SEC enforcement action of all time, the SEC charged Elon Musk with securities fraud on September 27, 2018 after settlement agreements reportedly fell apart.  Selecting the nuclear option, one of the remedies the SEC sought was to bar the iconic Mr. Musk as serving as an officer or director of a public company. By September 29, 2018, the action against Mr. Musk and a separate action against Tesla were settled.

According to the SEC, the settlement terms were as follows:

  • Musk will step down as Tesla’s Chairman and be replaced by an independent Chairman. Musk will be ineligible to be re-elected Chairman for three years;
  • Tesla will appoint a total of two new independent directors to its board;
  • Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee MR. Musk’s communications;
  • Musk and Tesla will each pay a separate $20 million penalty. The $40 million in penalties will be distributed to harmed investors under a court-approved process.

On November 5, 2013, Tesla filed a Form 8-K disclosing that Mr. Musk’s Twitter account would be used to disseminate material information about the company. In the complaint against Tesla, the SEC alleged Mr. Musk did not routinely consult with anyone at Tesla before publishing Tesla-related information via his Twitter account. Likewise, no one at Tesla reviewed Mr. Musk’s tweets prior to publication.

The SEC charged Tesla with violating Rule 13a-15 of the Exchange Act because:

  • Tesla failed to maintain controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits pursuant to the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Commission’s rules and forms.
  • Tesla also failed to maintain controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits pursuant to the Exchange Act is accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Devoid from the complaint against Tesla is any allegation whatsoever that Tesla improperly failed to file a required SEC report or filed an incorrect SEC report. The fact that there were no disclosure controls and procedures is enough.

So the message to public companies is clear: If you have executives out there communicating material information on social media, you need to have disclosure controls and procedures in place to review the information before and after publication. Or at least one or the other.

It would seem the White House would benefit from a similar rule.

On September 28, 2018, S&P Dow Jones Indices and MSCI, Inc. will introduce a new grouping to their Global Industry Classification Standard (GICS) system. This new classification, coded 5020, will be called “Media & Entertainment.” Certain other changes, including renaming the top-level GICS 50 industry, eliminating GICS 2540 (“Media”), and creating six- and eight-digit classifications within GICS 5020, will also be made.

Certain ISS policies, procedures, and products rely on GICS classifications, including executive compensation peer group formation, equity compensation plan evaluation, and Environmental & Social QualityScore. ISS has issued FAQs designed to answer the most frequently asked questions regarding how the adjustment to GICS structure will impact ISS analyses, and when those changes will be effective.

The FAQs address the following questions:

  • How will the new GICS code affect the evaluation of equity compensation plans under ISS’ U.S. Equity Plan Scorecard?
  • How will the new GICS code affect the evaluation of equity plans under ISS’ burn rate policy for France?
  • How will the new GICS code affect the evaluation of executive compensation?
  • How will the new GICS code affect the evaluation of director compensation?
  • How will the new GICS code affect Environmental & Social QualityScore?
  • How will the new GICS code affect ISS policies, such as the director performance evaluation policy, that examine a company’s TSR performance relative to its industry?
  • When will Question 130 in Governance QualityScore, which examines each covered company’s burn rate relative to its industry, be updated to reflect the new GICS structure?

SEC staff recently issued this Compliance and Disclosure Interpretation:

Question 105.09

Question: On August 17, 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The amendments will become effective 30 days after publication in the Federal Register. Among the amendments is the requirement to presentthe changes in shareholders’ equity in the interim financial statements (either in a separate statement or footnote) in quarterly reports on Form 10-Q. Refer to Rules 8-03(a)(5) and 10-01(a)(7) of Regulation S-X. When are filers expected to comply with this new requirement?

Answer: The amendments are effective for all filings made 30 days after publication in the Federal Register. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the filing date for most filers’ quarterly reports, the staff would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. For example, assuming an effective date of October 25, a December 31 fiscal year-end filer could omit this disclosure from its September 30, 2018 Form 10-Q. Likewise, a June 30 fiscal year-end filer could omit this disclosure from its September 30, 2018 and December 31, 2018 Forms 10-Q; however, the staff would object if it did not provide the disclosures in its March 31, 2019 Form 10-Q. (Sept. 25, 2018)

The FTC recently spoke about the time it takes review a consent package after FTC staff and the parties formally submit a settlement package to the Director of the Bureau of Competition.

According to the FTC it typically takes four weeks to review a consent package after staff and the parties formally submit the settlement package to the Director of the Bureau of Competition. The Director of the Bureau of Competition then will take two weeks to review the consent package. Once the Director agrees that the proposed settlement addresses the competitive risk raised by the merger, the Director will make a recommendation to the Commission that the Commission accept the proposed consent order for public comment. The Bureau of Economics will separately make its own recommendation. The Commission will typically take two weeks to review the Bureau Directors’ recommendations before voting on whether to accept the consent. The Commission’s time to review and to vote is solely in the Commission’s discretion and the Commissioners’ review may exceed two weeks when necessary.

The FTC notes the foregoing timelines for Bureau’s and Commission review may be shortened or lengthened—in the discretion of the Bureau Directors in the first period, or the Commission in the second period— and suggests counsel should not make commitments that the review period will be shorter.

The FTC also notes if parties believe that expedited review of a consent package is appropriate in their particular matter, they must submit a letter requesting expedited review and explaining why expedited review is requested. According to the FTC, before seeking expedited review, parties should have notified Bureau of Competition staff as early as possible during the investigation of the issues cited in the letter justifying expedited review. The FTC believes expedited review is unlikely to be granted when the parties had the power to address these issues themselves, or it was reasonably foreseeable that there would be timing issues (e.g., the parties negotiated a drop-dead date that allowed only four months to close, or agreed to a ticking fee on financing that failed to anticipate antitrust review). According to the FTC routine business exigencies related to deal closing are unlikely to constitute sufficient grounds for expedited review. Finally, the FTC states frequent outreach to the Bureau of Competition Front Office or to Commissioners’ offices is unlikely to expedite a decision further once a letter is received.

 

As noted on our Benefits Notes blog, on August 21, 2018, the IRS issued its initial guidance on the amendments to Section 162(m) made by the Tax Cuts and Jobs Act, in the form of Notice 2018-68. The guidance is fairly limited and does not completely address some of the questions it takes on. Notably, the guidance on what compensation will not be subject to the amended Section 162(m) under the grandfather rule may be very restrictive with respect to performance-based compensation that is subject to negative discretion, depending on the extent to which that discretion may be exercised under applicable law.

As a reminder, Section 162(m) limits the deduction for compensation paid to certain employees of companies with publicly traded equity or debt (“covered employees”) to $1 million per year. Among other things, the amendments to Section 162(m) eliminated the exception from that limitation for performance-based compensation and redefined covered employees so that once an employee becomes a covered employee, he or she remains one, even after termination of employment.  Similar to Section 162(m) as originally enacted, the amendments provide for grandfathering of compensation paid pursuant to a “written binding contract” in effect on November 2, 2017 that is not modified in any material respect.  The key areas addressed by the guidance are how covered employees are identified and what compensation will be eligible for grandfathering.

We recommend issuers review their Section 162(m) disclosures in proxy statements as a result of the foregoing.

We have also updated our blog on Preliminary Planning for the 2019 Proxy Season to reflect the foregoing.

 

For those who want to start preparing for the 2019 proxy season, our preliminary list of important considerations is set forth below:

Review 162(m) Disclosures in Proxy Statements

We recommend issuers review their Section 162(m) disclosures in proxy statements. As noted on our Benefits Notes blog, on August 21, 2018, the IRS issued its initial guidance on the amendments to Section 162(m) made by the Tax Cuts and Jobs Act, in the form of Notice 2018-68. The guidance is fairly limited and does not completely address some of the questions it takes on. Notably, the guidance on what compensation will not be subject to the amended Section 162(m) under the grandfather rule may be very restrictive with respect to performance-based compensation that is subject to negative discretion, depending on the extent to which that discretion may be exercised under applicable law.

Directors’ and Officers’ Questionnaires

We are not aware of any corporate governance changes that would require directors’ and officers’ questionnaires to be updated.  As a result of the changes to Section 162(m) noted above, questions arise as to whether questions in directors’ and officers’ questionnaires related to §162(m) for compensation committee members can be eliminated. Potentially that is possible if it is clear the compensation committee is not required to administer any compensation arrangements under the grandfather rule.  We urge caution in that regard, and Notice 2018-68 referred to above should be reviewed before making any changes to the questionnaire.

Determine Your Status as an Issuer

The SEC has adopted final rules, effective September 10, 2018, to expand the availability of scaled disclosure requirements for a company qualifying as a smaller reporting company, or SRC, by allowing companies with a public float of less than $250 million to qualify as an SRC, as compared to the $75 million threshold under the prior definition.  In addition, companies that either do not have a public float or have a public float of less than $700 million are now permitted to provide scaled disclosures if annual revenues are less than $100 million, as compared to the prior threshold of less than $50 million in annual revenues.  Some smaller reporting companies may not be required to transition as a result of the more generous rules, and others who did not previously qualify as a smaller reporting company may wish to avail themselves of the scaled disclosure option.

A reporting company will determine whether it qualifies as a SRC annually as of the last business day of its second fiscal quarter. If it qualifies as a SRC on that date, it may elect to reflect that determination and use the SRC scaled disclosure accommodations in its subsequent filings, beginning with its second quarter Form 10-Q. As in prior years, issuers should verify whether or not they are transitioning from status as a non-accelerated filer, accelerated filer or large accelerated filer.

In the release revising the thresholds for SRC eligibility, the SEC did not did not raise the accelerated filer public float threshold or otherwise modify the Section 404(b) requirements (which include mandatory auditor attestation of internal controls) for registrants with a public float between $75 million and $250 million.

Issuers that rely on emerging growth company status, or EGCs, should also determine if they remain eligible as an EGC. Among other tests, an issuer is only allowed to retain EGC status for five years after its IPO, and the five-year window is closing for some.

Say-on-Pay Frequency Vote

Rule 14a-21(b) requires a say-on-pay frequency vote every six years. Issuers should review their own particular facts and circumstances to determine if they are required to hold a say-on-pay frequency vote.  We note that issuers that formerly qualified as EGCs should also remain mindful of say-on-pay requirements as issuers that no longer qualify as EGCs lose their exemption from the requirements under Exchange Act Sections 14A(a) and (b).  Such former EGCs are required to begin providing say-on-pay votes within one year of losing EGC status (or no later than three years after selling securities under an effective registration statement if an issuer was an EGC for less than two years).  Typically, such companies will also hold say-on-pay frequency votes when they hold their first say-on-pay vote as a non-EGC.

Inline XBRL

The SEC also adopted final rules to require the use of Inline XBRL. Currently, data in XBRL format is attached as an exhibit to SEC filings. Inline XBRL allows filers to embed XBRL data directly into the body of the SEC filing, eliminating most of the need to tag a copy of the information in a separate XBRL exhibit.  Inline XBRL will still require exhibits to be used to provide contextual information about the XBRL tags embedded in the filing.

The use of Inline XBRL will not be required in Form 10-Ks for the calendar year ended December 31, 2018. Large accelerated filers will be required to use Inline XBRL beginning with their first Form 10-Q filing for a fiscal period ending on or after June 15, 2019.

Changes to Form 10-K Cover Page

The adoption of rules related to expanded SRC status and Inline XBRL will require changes to the applicable selection boxes on the cover page of Form 10-K.  Changes related to SRC status are effective as of September 10, 2018.  Changes related to Inline XBRL are effective September 17, 2018.

Disclosure Simplification

The SEC’s new rules implementing disclosure simplification mostly address accounting matters in Regulation S-X, but provide some modest relief for Form 10-Ks.  Among other things, certain previously-required disclosures are eliminated from the required business description, and issuers are no longer required to provide a history of stock prices and dividend history in their Form 10-K.

Form 10-K – Selected Financial Date

The SEC has confirmed in its Financial Reporting Manual (paragraph 11110.1) that issuers that adopt the new revenue recognition standard using the full retrospective method do not need to apply the new revenue standard when reporting selected financial data (S-K Item 301) for periods prior to those presented in its retroactively-adjusted financial statements. However, such issuers must provide the information required by Instruction 2 to S-K Item 301 regarding comparability of the data presented. Instruction 2 requires issuers to briefly describe, or cross-reference to, a discussion thereof, factors such as accounting changes, business combinations or dispositions of business operations, that materially affect the comparability of the information reflected in selected financial data.

Pay Ratio Disclosure

Pay ratio disclosure appears to be here to stay. In general, the “pay ratio” rule requires public companies to disclose the median of the annual total compensation of all employees of a registrant (excluding the chief executive officer), the annual total compensation of that registrant’s chief executive officer, and the ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer.

We have drafted a checklist outlining the disclosure requirements of the pay ratio rule.

Critical Audit Matters

The Public Company Accounting Oversight Board adopted a new auditor reporting standard that will require more information about the audit, including critical audit matters. The new standard has been approved by the SEC. However, it will not be effective for calendar year issuers this year. The new standard will be applicable for large accelerated filers for audits for fiscal years ending on or after June 30, 2019.  As a result, we encourage issuers to continue monitoring implementation of the new auditor reporting standard with their audit committee and auditors.

ISS Proxy Voting Policies

ISS is in the process of formulating changes to its voting recommendation policies and has released its 2019 Governance Principles Survey and the accompanying Policy Application Survey.  The surveys generally foreshadow changes to policies for the upcoming proxy season.  This year’s Governance Principles Survey focuses on auditor ratification, director accountability and track records, gender diversity on boards and the one-share, one-vote principle.  This year’s Policy Application Survey focuses on independent chair shareholder proposals, disclosure of directors’ skills, quantitative pay-for-performance screens, director pay and minimum stock ownership requirements for binding bylaw amendments. We recommend that issuers monitor ISS’ new and updated policies, including ISS’s official proxy voting guidelines, which are typically issued in December for the upcoming proxy season.

Perq Disclosures

We recommend public companies take steps to ensure that all staff are appropriately trained when compiling compensation disclosures. In a settled enforcement action, the SEC targeted an issuer for using the wrong standard for disclosures of perqs in the summary compensation table.  In addition, the SEC alleged the issuer did not adequately train employees in key roles, including those tasked with drafting the CD&A section of the proxy statement and compiling the executive compensation tables, to ensure that the proper standard was applied for perquisites disclosure.  The SEC also alleged the issuer had inadequate processes and procedures to ensure proper reporting of perquisites. The issuer’s personnel compiled the executive compensation table from a variety of sources without ensuring that the amounts reported were consistent with the Commission’s perquisite disclosure rules.  The issuer, which did not admit or deny the SEC’s findings, agreed to pay a civil money penalty in the amount of $1,750,000.  Among other things, the issuer also agreed to retain at its own expense an independent consultant, not unacceptable to the staff of the Commission, for a period of one year, to conduct a review of the issuer’s policies, procedures, controls, and training relating to the evaluation of whether payments and other expense reimbursements should be disclosed as perquisites under the securities laws, including the Commission’s rules and standards.

Cybersecurity Disclosures

In February 2018, the SEC outlined its views with respect to cybersecurity disclosure requirements under the federal securities laws as they apply to public reporting companies. We have developed a comprehensive checklist based on the SEC’s views.

SEC Issues Compensation Plan C&DIs

The SEC issued a series of Compliance and Disclosure Interpretations, or CD&Is, on proxy statements and proxy solicitations. The CD&Is in general replaced previously issued telephone interpretations. A number of the CD&Is address Item 10 of Schedule 14A, which sets forth disclosure requirements when compensation plans are submitted for shareholder approval. Issuers that will have a compensation plan on their ballot may find these CD&Is to be a useful resource.

Other Regulatory Initiatives

Proposed rules have been issued on the following topics, but final rules have not been adopted:

Similarly, press reports speculate that the SEC has deferred plans to implement its proposed universal proxy rules.  However, a universal proxy card was first used in 2018 by a U.S.-incorporated company.  If speculation in the press is accurate, it appears that private ordering, and not regulatory action, will be the primary force behind the use of universal proxy cards going forward.

Shareholder Proposals

Observations from the 2018 season:

  • An increase in the number of environmental/social/political (“ESP”) proposals withdrawn suggests that companies may be adopting a strategy of shareholder engagement to address ESP issues.
  • A lower number of governance proposals passed this year than in 2017, reflecting a reduced number of proposals submitted with respect to common governance issues (e.g., proxy access, majority voting, board declassification, supermajority vote).
  • 2018 reflected an increase in the submission of proposals focusing on the thresholds for calling a special meeting, the right to act by written consent, appointing an independent chair, and an increase in the relative level of shareholder support for these matters.
  • Fewer proposals focused on adopting and revising proxy access were submitted in 2018 and few were put to a shareholder vote.
  • Despite the SEC staff’s release of “issuer-friendly” shareholder proposal guidance in the fall of 2017, issuers’ inclusion of the board’s analysis of a proposal’s significance (in relation to the ordinary business and economic relevance bases for exclusion) did not yield overwhelmingly positive results for issuers in no-action requests in 2018. Still, issuers considering this strategy should not be dissuaded, as several of these requests did not fully adhere to the staff’s guidance and the staff’s responses in other requests provided additional clarity on what could make for a successful argument.

Proxy Modifications on the Horizon

Following up on its 2010 Concept Release seeking public comment on the mechanics of communications and voting under the SEC’s proxy rules, the SEC’s Chairman has announced that the staff will host a roundtable this fall to hear from investors, issuers, and other market participants on possible refinement to the SEC’s proxy rules with a focus on the following topics: the proxy voting process, retail shareholder participation, shareholder proposals, and proxy advisory firms.

Time will tell whether any of these discussion points will find their way into future Commission rulemakings in a more substantive manner than in the 2010 concept release.