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

In 2019, the SEC proposed changes to its proxy advisor rules (the “2019 Proposed Rules”).  Later the SEC adopted final rules regarding proxy voting advice (the “2020 Final Rules”) provided by proxy advisory firms, or proxy voting advice businesses (“PVABs”).  PVABs include ISS, Glass Lewis and other proxy advisors.  The SEC now proposes to amend the 2020 Final Rules.

Background

The 2020 Final Rules, among other things, did the following:

  • Amended 17 CFR 240.14a-1(l) (“Rule 14a-1(l)”) to codify the Commission’s interpretation that proxy voting advice generally constitutes a “solicitation” subject to the proxy rules.
  • Adopted 17 CFR 240.14a-2(b)(9) (“Rule 14a-2(b)(9)”) to add new conditions to two exemptions (set forth in 17 CFR 240.14a-2(b)(1) and (3) (“Rules 14a-2(b)(1) and (3)”)) that PVABs generally rely on to avoid the proxy rules’ information and filing requirements. Those conditions include:
    • New conflicts of interest disclosure requirements in 17 CFR 240.14a-2(b)(9)(i) (“Rule 14a-2(b)(9)(i)”); and
    • A requirement in 17 CFR 240.14a-2(b)(9)(ii) (“Rule 14a-2(b)(9)(ii)”) that a PVAB adopt and publicly disclose written policies and procedures reasonably designed to ensure that (A) registrants that are the subject of proxy voting advice have such advice made available to them at or prior to the time such advice is disseminated to the PVAB’s clients and (B) the PVAB provides its clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding its proxy voting advice by registrants that are the subject of such advice, in a timely manner before the security holder meeting (the “Rule 14a-2(b)(9)(ii) conditions”).
  • Amended the Note to Rule 14a-9, which prohibits false or misleading statements, to include specific examples of material misstatements or omissions related to proxy voting advice.

In addition to those two conditions noted, Rule 14a-2(b)(9) also sets forth two non-exclusive safe harbor provisions in paragraphs (iii) and (iv) that, if met, are intended to give assurance to PVABs that they have satisfied the conditions of Rules 14a-2(b)(9)(ii)(A) and (B).  Further, Rules 14a-2(b)(9)(v) and (vi) contain exclusions from the Rule 14a-2(b)(9)(ii) conditions. Those rules provide that PVABs need not comply with Rule 14a2(b)(9)(ii) to the extent that their proxy voting advice is based on a client’s custom voting policy or if they provide proxy voting advice as to non-exempt solicitations regarding certain mergers and acquisitions or contested matters.

The SEC stated the proposed amendments do not represent a wholesale reversal of the 2020 Final Rules. Rather, they are intended to be tailored adjustments in response to concerns and developments related to particular aspects of the 2020 Final Rules. The goal of the proposed amendments is to avoid burdens on PVABs that may impede and impair the timeliness and independence of their proxy voting advice and subject them to undue litigation risks and compliance costs, while simultaneously preserving investors’ confidence in the integrity of such advice.

Proposed Amendments to Rule 14a-2(b)(9)

According to the SEC investors continue to express strong concerns about the Rule 14a-2(b)(9)(ii) conditions.  The SEC states investors have asserted that the Rule 14a-2(b)(9)(ii) conditions impose increased compliance costs on PVABs and impair the independence and timeliness of their proxy voting advice and that such effects are not justified or balanced by corresponding investor protection benefits.

The SEC is proposing to amend Rule 14a-2(b)(9) by deleting paragraph (ii) and rescinding the Rule 14a-2(b)(9)(ii) conditions. The proposed amendments would also delete paragraphs (iii), (iv), (v) and (vi) of Rule 14a-2(b)(9), which contain safe harbors and exclusions from the Rule 14a-2(b)(9)(ii) conditions. The Rule 14a-2(b)(9)(ii) conditions were intended to benefit shareholders by improving the overall mix of available information so as to allow them to make more informed voting decisions. While the goal of facilitating more informed voting decisions remains unchanged, the SEC believes that the continued concerns expressed by the investors who rely on proxy voting advice to make their voting decisions warrants a reassessment of the appropriate means to achieve that goal.

When adopting the proposed amendments, the SEC considered PVABs’ efforts to develop industry-wide practices, as well as improve their own business practices, that could address the concerns underlying the Rule 14a-2(b)(9)(ii) conditions.  The SEC noted ISS has mechanisms in place that approximate at least a portion of the Rule 14a2(b)(9)(ii) conditions. Specifically, ISS makes its proxy voting advice available to registrants at the time such advice is disseminated to its clients. Although ISS does not update its proxy voting advice to incorporate any response a registrant may have to such advice, it does offer its advice to registrants for free. This presumably makes it easier for registrants to access ISS’ proxy voting advice and respond to such advice by publishing and filing additional soliciting materials in a more timely manner.

Proposed Amendment to Rule 14a-9

In the adopting release for the 2020 Final Rules, the SEC codified the guidance set forth in a previous interpretive release that proxy voting advice is generally subject to Rule 14a-9. The 2020 Final Rules amended Rule 14a-9 by adding paragraph (e) to the Note to that rule. Paragraph (e) sets forth examples of what may, depending on the particular facts and circumstances, be misleading within the meaning of Rule 14a-9 with respect to proxy voting advice. Specifically, Note (e) to Rule 14a-9 provides that the failure to disclose material information regarding proxy voting advice, such as the PVAB’s methodology, sources of information, or conflicts of interest could, depending upon particular facts and circumstances, be misleading within the meaning of the rule.

According to the SEC, PVABs, their clients and other investors continue to express concerns and uncertainty regarding the extent of PVABs’ liability under Rule 14a-9. PVABs continue to assert that the amendments may increase their litigation risks, thereby increasing their costs, which, ultimately, may be passed along to their clients. These parties indicate that those litigation risks could also impair the independence and quality of PVABs’ proxy voting advice if, for example, registrants use the threat of litigation to pressure PVABs to make their proxy voting advice more favorable to such registrants. Further, PVABs and their clients remain concerned that Rule 14a-9 claims may be available for registrants who disagree with their proxy voting advice. Such disagreements could pertain not only to PVABs’ voting recommendations, but also to the specific methodology, analysis and information that PVABs use to formulate their recommendations.

In light of these concerns, the SEC is proposing to delete Note (e) to Rule 14a-9. As discussed above, Note (e) sets forth examples of what may, depending on the particular facts and circumstances, be misleading within the meaning of Rule 14a-9 with respect to proxy voting advice. Although Note (e) was intended by the SEC to clarify the potential implications of Rule 14a-9 for proxy voting advice under existing law, the SEC believes it appears instead to have unintentionally created a misperception that the addition of Note (e) to Rule 14a-9 purported to determine or alter the law governing Rule 14a-9’s application and scope, including its application to statements of opinion.  The proposed deletion of Note (e) is intended by the SEC to address that misperception and thereby reduce any resulting uncertainty that could lead to increased litigation risks or the threat of litigation and impaired independence of proxy voting advice.

In 2016 the SEC adopted proposed rules related to use of universal proxies in contested director elections. The SEC has now adopted final rules.  The SEC also adopted changes to the form of proxy and proxy statement disclosure requirements applicable to all director elections.

The new rules will require use of a “universal proxy card” in all non-exempt director election contests. This universal proxy card must include the names of all duly nominated director candidates presented for election by any party and for whom proxies are solicited. The SEC believes requiring a universal proxy card in non-exempt director election contests is the most effective means to ensure that shareholders voting by proxy are able to elect directors in a manner consistent with their right to vote in person at a shareholder meeting.

The final rules:

  • Require the use of a universal proxy card by all participants in a non-exempt director election contest. The universal proxy card must include the names of both registrant and dissident nominees, along with certain other shareholder nominees included as a result of proxy access;
  • Expand the determination of a “bona fide nominee” to include a person who consents to being named in any proxy statement for a registrant’s next shareholder meeting for the election of directors;
  • Require dissidents to provide registrants with notice of their intent to solicit proxies and to provide the names of their nominees no later than 60 calendar days before the anniversary of the previous year’s annual meeting;
  • Require registrants to notify dissidents of the names of the registrants’ nominees no later than 50 calendar days before the anniversary of the previous year’s annual meeting;
  • Require dissidents to file their definitive proxy statement by the later of 25 calendar days before the shareholder meeting or five calendar days after the registrant files its definitive proxy statement;
  • Require each side in a proxy contest to refer shareholders to the other party’s proxy statement for information about the other party’s nominees and refer shareholders to the Commission’s website to access the other side’s proxy statement free of charge;
  • Require that dissidents solicit the holders of shares representing at least 67% of the voting power of the shares entitled to vote at the meeting; and
  • Establish presentation and formatting requirements for universal proxy cards that ensure that each party’s nominees are presented in a clear, neutral manner.

The SEC also adopted, as proposed, changes to the form of proxy and proxy statement disclosure requirements applicable to all director elections. These amendments:

  • Require proxy cards to include an “against” voting option in director elections, when there is a legal effect to a vote against a director nominee;
  • Require that the proxy card provide shareholders with the ability to “abstain” in a director election where a majority voting standard applies; and
  • Require proxy statement disclosure about the effect of a “withhold” vote in an election of directors.

Compliance with the new rules will be required for shareholder meetings held after August 31, 2022.

The SEC Division of Corporation Finance announced it has rescinded Staff Legal Bulletin (“SLBs”) Nos. 14I, 14J and 14K after a review of staff experience applying the guidance in them.  Public companies relied on the guidance in the SLBs to determine whether to seek a no-action letter to exclude shareholder proposals under Rule 14a-8, to engage with the shareholder proponent or to include the shareholder proposal in the company’s proxy statement.

Ordinary Business Operations

Rule 14a-8(i)(7), the ordinary business exception, is one of the substantive bases for exclusion of a shareholder proposal in Rule 14a-8. It permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” The purpose of the exception is “to confine the resolution of ordinary business problems to management and the board of directors, since it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting.”

Going forward, the staff will realign its approach for determining whether a proposal relates to “ordinary business” with the standard the SEC initially articulated in 1976, which provided an exception for certain proposals that raise significant social policy issues, and which the SEC subsequently reaffirmed. According to the SEC, this exception is essential for preserving shareholders’ right to bring important issues before other shareholders by means of the company’s proxy statement, while also recognizing the board’s authority over most day-to-day business matters. For these reasons, staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.

Under this realigned approach, proposals that the staff previously viewed as excludable because they did not appear to raise a policy issue of significance for the company may no longer be viewed as excludable under Rule 14a-8(i)(7). For example, proposals squarely raising human capital management issues with a broad societal impact would not be subject to exclusion solely because the proponent did not demonstrate that the human capital management issue was significant to the company.

Because the staff is no longer taking a company-specific approach to evaluating the significance of a policy issue under Rule 14a-8(i)(7), it will no longer expect a board analysis as described in the rescinded SLBs as part of demonstrating that the proposal is excludable under the ordinary business exclusion.

Micromanagement

Upon further consideration, the staff has determined that its recent application of the micromanagement concept expanded the concept of micromanagement beyond the Commission’s policy directives. Specifically, the staff believes that the rescinded guidance may have been taken to mean that any limit on company or board discretion constitutes micromanagement.

The staff stated it will take a measured approach to evaluating companies’ micromanagement arguments – recognizing that proposals seeking detail or seeking to promote timeframes or methods do not per se constitute micromanagement. Instead, the staff will focus on the level of granularity sought in the proposal and whether and to what extent it inappropriately limits discretion of the board or management. The staff stated it would expect the level of detail included in a shareholder proposal to be consistent with that needed to enable investors to assess an issuer’s impacts, progress towards goals, risks or other strategic matters appropriate for shareholder input.

Additionally, in order to assess whether a proposal probes matters “too complex” for shareholders, as a group, to make an informed judgment, the staff may consider the sophistication of investors generally on the matter, the availability of data, and the robustness of public discussion and analysis on the topic. The staff may also consider references to well-established national or international frameworks when assessing proposals related to disclosure, target setting, and timeframes as indicative of topics that shareholders are well-equipped to evaluate.

Going forward the staff will not concur in the exclusion of proposals that suggest targets or timelines so long as the proposals afford discretion to management as to how to achieve such goals.

Economic Relevance

Rule 14a-8(i)(5), the “economic relevance” exception, permits a company to exclude a proposal that “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.”

Based on a review of the rescinded SLBs and staff experience applying the guidance in them, the staff is returning to its approach, prior to SLB No. 14I, of analyzing Rule 14a-8(i)(5) in a manner it believes is consistent with case law.  As a result proposals that raise issues of broad social or ethical concern related to the company’s business may not be excluded, even if the relevant business falls below the economic thresholds of Rule 14a-8(i)(5). In light of this approach, the staff will no longer expect a board analysis for its consideration of a no-action request under Rule 14a-8(i)(5).

Other

The staff also republished, with what it describes as primarily technical, conforming changes, the guidance contained in SLB Nos. 14I and 14K relating to the use of graphics and images, and proof of ownership letters. In addition, the staff provided new guidance on the use of e-mail for submission of proposals, delivery of notice of defects, and responses to those notices.

ISS has published proposed policy changes for 2022 for public comment. The following summarizes proposed changes for the U.S. market.

Board Diversity.  Proposed U.S. policy changes will extend board gender diversity requirements to a larger universe of companies from 2023 and following a one-year grace period.  This policy will also apply for companies not in the Russell 3000 and S&P1500 indices, effective for meetings on or after Feb. 1, 2023.

Unequal Voting Rights – Board Accountability. When ISS implemented its original U.S. policy on unequal voting rights in 2015, the focus was on addressing investor concerns with newly-public companies that adopted unequal voting rights without a sunset mechanism. Therefore, companies with an unequal voting rights structure whose first public shareholder meeting was prior to 2015 were exempted from the new policy. ISS is now proposing to remove the differential policy application that arose from that grandfathering and after a year’s grace period in 2022, to begin in 2023 recommending against the responsible director/s at all U.S. companies with unequal voting rights.

Climate – Board Accountability. For companies that are significant greenhouse gas (GHG) emitters, through their operations or value chain, ISS will generally vote against or withhold from the responsible incumbent director, committee, or full board in cases where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the larger economy.

For 2022, minimum steps to understand and mitigate those risks are considered to be:

  • Detailed disclosure of climate-related risks, such as according to the framework established by the Task Force on Climate-related Financial Disclosures (TCFD), including:
    • Board governance measures;
    • Corporate strategy;
    • Risk management analyses; and
    • Metrics and targets.
  • Appropriate GHG emissions reduction targets.

For 2022, “appropriate GHG emissions reductions targets” will be any well-defined GHG reduction targets. Targets for Scope 3 emissions will not be required for 2022 but the targets should cover at least a significant portion of the company’s direct emissions. Expectations about what constitutes “minimum steps to mitigate risks related to climate change” will increase over time.

Climate – Management Say-on-Climate Proposals.  ISS will vote case-by-case on management proposals that request shareholders to approve the company’s climate transition action plan, taking into account the completeness and rigor of the plan.

Climate – Shareholder Say-on-Climate Proposals. ISS will vote case-by-case on shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan and provide shareholders the opportunity to regularly express approval or disapproval of its GHG emissions reduction plan, taking into account information such as the following:

  • The completeness and rigor of the company’s climate-related disclosure;
  • The company’s actual GHG emissions performance;
  • Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to its GHG emissions; and
  • Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive.

In 2015 the SEC proposed rules to implement Section 954 of the Dodd-Frank which added Section 10D to the Securities Exchange Act of 1934. Section 10D requires the SEC to adopt rules directing the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with Section 10D’s requirements for disclosure of the issuer’s policy on incentive-based compensation and recovery of incentive-based compensation that is received in excess of what would have been received under an accounting restatement. Many refer to Section 10D  as the clawback rules.

The proposed clawback rules were never finalized.  However, the SEC has reopened the comment period on the proposed clawback rules.

The SEC asks a number of interesting questions in the notice announcing the reopening of the comment period.

For instance, the SEC asks if the scope of the proposed clawback rules should include:

  • restatements that correct errors that are material to previously issued financial statements and
  • restatements that correct errors that are not material to previously issued financial statements, but would result in a material misstatement if
    • the errors were left uncorrected in the current report or
    • the error correction was recognized in the current period

The SEC also notes that if it interprets the statutory term “an accounting restatement due to material noncompliance” to include restatements required to correct errors that were not material to previously issued financial statements, but would result in a material misstatement if (a) the errors were left uncorrected in the current report or (b) the error correction was recognized in the current period, then those restatements would require a recovery analysis.

According to the SEC registrants do not always label historical financial statements as “restated” for the foregoing types of restatements. Also, the SEC believes an Item 4.02 Form 8-K filing is not typically filed for that type of error, because the error is not material to the previously issued financial statements. As such, to provide greater transparency around such restatements, the SEC is considering whether to add check boxes to the cover page of the Form 10-K that indicate separately (a) whether the previously issued financial statements included in the filing include an error correction, and (b) whether any such corrections are restatements that triggered a clawback analysis during the fiscal year.

The SEC has adopted amendments that it believes will modernize filing fee disclosure and payment methods. The revised rules amend most fee-bearing forms, schedules, statements, and related rules to require each filing fee table and accompanying disclosure to include all required information for fee calculation in a structured format. The amendments also add options for fee payment via Automated Clearing House (“ACH”) and debit and credit cards, and eliminate options for fee payment via paper checks and money orders.

The current methods by which filers and the SEC staff process and validate EDGAR filing fee information within the filing are highly manual and labor-intensive.  Filing fee related information is generally not machine-readable and the underlying components used for the calculation are not always required to be reported.

Currently, the SEC staff conducts a manual review of the filing fee information for every fee-bearing filing that is filed with the SEC. When there are discrepancies between filing fee information appearing in the header and in the filing fee table on the cover page of the filing, the staff must resolve the discrepancy and often has to contact the filer to do so. The SEC expects the new amendments will make the filing fee payment validation process faster and more efficient by enabling the staff to use automated tools to help validate payment information with respect to complicated situations.

The revised rules generally require the filing fee-related information in a separate filing fee exhibit rather than on the cover page of a filing.  Filers’ presentation of filing fee-related information in one location in a structured format will help filers and Commission staff quickly identify and correct errors, as the SEC’s EDGAR system will automatically check the structured filing fee-related information for internal consistency.

The amendments generally will be effective on Jan. 31, 2022. The amendments that will add or eliminate payment options will be effective on May 31, 2022. Pursuant to the transition provision, large accelerated filers will become subject to the structuring requirements for filings they submit on or after 30 months after the Jan. 31, 2022 effective date. Accelerated filers, certain investment companies that file registration statements on Forms N-2 and N-14, and all other filers will become subject to the structuring requirements for filings they submit on or after 42 months after the Jan. 31, 2022 effective date. Compliance with the amended disclosure requirements other than the structuring requirements will be mandatory on the Jan. 31, 2022 effective date.

The amendments permit all filers to file their filing fee-related information structured in Inline XBRL prior to the compliance date for each category of filers. The SEC will make available a separate filing agent test system for this purpose. Filers will be able to file under the amendments once the EDGAR system has been modified to accept filing fee related information in Inline XBRL for all fee-bearing documents subject to the amendments, which is anticipated to be approximately six months before the earliest compliance date.

Section 312.07 of the NYSE Listed Company Manual provides that, where shareholder approval is a prerequisite to the listing of any additional or new securities of a listed company, or where any matter requires shareholder approval, the minimum vote which will constitute shareholder approval for such purposes is defined as approval by a majority of votes cast on a proposal in a proxy bearing on the particular matter. Section 312.07 is currently applicable to shareholder approval of stock issuances under Sections 303A.08 (equity compensation) and 312.03 of the Manual.

The text of Section 312.07 does not specifically address the treatment of abstentions. However, the NYSE has historically advised companies that abstentions should be treated as votes cast for purposes of Section 312.07. Under that approach, a proposal is deemed approved under Section 312.07 only if the votes in favor of the proposal exceed the aggregate of the votes cast against the proposal plus abstentions. This approach has caused confusion among listed companies. The corporate laws of many states, including Delaware, allow companies to include in their governing documents that votes cast for purposes of a shareholder vote includes yes and no votes (but not abstentions), such that consistent with those state laws, many public companies have bylaws indicating that abstentions are not treated as votes cast.

The NYSE has filed a rule proposal with the SEC to amend Section 312.07 to provide that a company must calculate the votes cast with respect to a proposal that is subject to Section 312.07 in accordance with its own governing documents and any applicable state law. The NYSE believes that this treatment of abstentions will avoid any complications engendered among issuers and shareholders when different voting standards are applied under the NYSE rule, a company’s governing documents, and/or applicable state laws.

In the rule proposal the NYSE notes that Nasdaq has a rule requiring that proposals receive a majority of “the votes cast,” but is silent on the question as to whether abstentions should be treated as votes cast. Nasdaq has published an FAQ on its website that clearly states: “Nasdaq does not define the term “votes cast”. As such, a company must calculate the ‘votes cast” in accordance with its governing documents and any applicable state law.”

Our preliminary list of important planning considerations for the 2022 proxy season is set forth below.

Directors’ and Officers’ Questionnaires; Committee Charters

We have identified only a few possible changes to date for D&O questionnaires and committee charters for the 2022 proxy season.

The NYSE amended the first paragraph of Section 314.00 (which was subsequently revised) of the listed company manual by stating that, for purposes of Section 314.00, the term “related party transaction” refers to transactions required to be disclosed pursuant to Item 404 of Regulation S-K under the Exchange Act, and, in the case of foreign private issuers, the term “related party transaction” refers to transactions required to be disclosed pursuant to Form 20-F, Item 7.B.

NYSE listed issuers who have detailed questions in their D&O questionnaires which reflect the current version of Item 404 of Regulation S-K should not need to update their D&O questionnaires.  It may be worthwhile for NYSE listed issuers to double check their audit committee charters to make sure the charters reflect other changes made by the rule amendments.

As noted in previous years, the Tax Cuts and Jobs Act eliminated the exception to IRC §162(m) for performance-based compensation, subject to a transition or “grandfather” rule. While likely few compensation arrangements are still grandfathered, this should be confirmed before eliminating questions in directors’ and officers’ questionnaires related to §162(m) for compensation committee members or references to §162(m) in compensation committee charters.

Nasdaq issuers may wish to begin modifying their D&O questionnaires to prepare for disclosures for the Board Diversity Matrix which is discussed below.

Nasdaq Diversity Rules

While the Nasdaq Board Diversity rules are not effective for the upcoming proxy season, the rules requiring disclosure of the Board Diversity Matrix become effective during 2022.  Nasdaq has published FAQS regarding the Board Diversity Rules, which contain information regarding publication of the Board Diversity Matrix:

“Companies must disclose the initial matrix in 2022.

      • If a company files its 2022 proxy BEFORE August 8, 2022 and DOES NOT include the Matrix, then the company has until August 8, 2022 to provide the Matrix.
      • If a company files its 2022 proxy ON or AFTER August 8, 2022, then it must either include the Matrix in its proxy or post the Matrix on its website within one business day of filing its proxy.
      • If a company does not intend to file a 2022 proxy, then the company has until August 8, 2022 to provide the Matrix on its website.

Companies that elect to provide the Matrix on its website must also complete a short form through the Listing Center that includes the URL link to the disclosure.”

Physical or Virtual Annual Meeting

Public companies will again need to determine whether to hold a physical or virtual annual meeting in the upcoming year.

Determine Your Status as an Issuer

Issuers should verify whether they are a large accelerated filer, accelerated filer, smaller reporting company (“SRC”) or emerging growth company (“EGC”).

Changes to Form 10-K: Holding Foreign Companies Accountable Act

The SEC has adopted interim final amendments to Form 10-K, Form 20-F, Form 40-F, and Form N-CSR to implement the disclosure and submission requirements of the Holding Foreign Companies Accountable Act, or the HFCA Act.  The HFCA Act became law on December 18, 2020. Among other things the HFCA Act requires the SEC to identify each “covered issuer” that has retained a registered public accounting firm to issue an audit report where that registered public accounting firm has a branch or office that:

  • Is located in a foreign jurisdiction; and
  • The PCAOB has determined that it is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction.

We do not expect the HFCAA to affect the issuers we work with.  We do note however that the SEC interim amendments requires companies subject to the interim rules to make certain disclosures in new Item 9C to Form 10-K captioned “Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.”  As such issuers should include the Item and caption in their Form 10-K and indicate the item is not applicable where appropriate.

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.

If you include a frequency vote, consider the related Form 8-K filing obligations.

MD&A

The SEC adopted wide ranging final rules affecting MD&A and other matters in a release captioned “Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information.”  Registrants are required to comply with the rule beginning with the first fiscal year ending on or after August 9, 2021.

Climate Change

In 2010 the SEC issued an interpretive release on registrant’s disclosures related to climate change. Public pronouncements indicate the SEC s in the process of formulating updated rules.  In all likelihood any new rule would not be effective for the upcoming proxy season.

Registrant disclosures under the existing interpretation have been under review by the SEC.  Compliance with the interpretation has also attracted the attention of the Division of Enforcement.  As such, public companies may want to ensure compliance with the 2010 interpretation where applicable.

You can find our analysis here.

SEC Adopts Final Rules Regarding Proxy Advisors

In September 2019, the Commission issued an interpretation and guidance addressing the application of the proxy rules to proxy voting advice businesses. In July2020, the Commission adopted amendments to Rules 14a-1(l), 14a-2(b), and 14a-9 concerning proxy voting advice.

Gary Gensler, Chair of the SEC directed the staff to consider whether to recommend further regulatory action regarding proxy voting advice. In particular, the staff was directed to consider whether to recommend that the Commission revisit its July 2020 codification of the definition of solicitation as encompassing proxy voting advice, the 2019 Interpretation and Guidance regarding that definition, and the conditions on exemptions from the information and filing requirements in the 2020 Rule Amendments, among other matters.

In light of Chair Gensler’s direction, the Division of Corporation Finance determined that it will not recommend enforcement action to the Commission based on the 2019 Interpretation and Guidance or the 2020 Rule Amendments during the period in which the Commission is considering further regulatory action in this area.

As a result, these rules and interpretations are not expected to play a role in the upcoming proxy season.

Modernization of Property Disclosures for Mining Registrants

The SEC adopted amendments to modernize the property disclosure requirements for mining registrants, and related guidance, previously set forth in Item 102 of Regulation S-K and in Industry Guide 7. The amendments are intended to provide investors with a more comprehensive understanding of a registrant’s mining properties, which should help them make more informed investment decisions. The SEC’s revised mining property disclosure requirements now appear in Subpart 1300 of Regulation S-K.

Registrants engaged in mining operations must comply with the final rule amendments for the first fiscal year beginning on or after January 1, 2021. Industry Guide 7 will remain effective until all registrants are required to comply with the final rules, at which time Industry Guide 7 will be rescinded.

ISS Proxy Voting Policies

ISS is in the process of formulating changes to its voting recommendation policies.  Earlier it released its benchmark policy survey which generally is the first public step in the process.  We recommend that issuers monitor ISS’s new and updated policies, including ISS’s official proxy voting guidelines, which are typically issued in December for the upcoming proxy season.

Inline XBRL

All other filers (basically anyone other than an accelerated filer that has not already been phased in) are required to use Inline XBRL with their first Form 10-Q filing for the fiscal period ending on or after June 15, 2021.  Further information can be found here.

Shareholder Proposals

The Commission adopted rules altering the shareholder proposals submission framework under Rule 14a-8 of the Exchange Act for the first time in over twenty years.

The share ownership thresholds for eligibility to submit an initial shareholder proposal were revised to employ a sliding scale based on the amounts of securities owned.

The Commission’s revised rules also modified the resubmission thresholds under Rule 14a-8 to increase the required support necessary to resubmit a proposal.

The new thresholds became effective January 4, 2021 and will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022.  The amendments also include a transition rule permitting shareholders to submit proposals in reliance on the prior initial submission threshold for meetings held prior to January 1, 2023.

Our expanded analysis of the changes is available here.

Resource Extraction Issuers

In December 2020, the SEC adopted final rules that will require resource extraction issuers that are required to file reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 to disclose payments made to the U.S. federal government or foreign governments for the commercial development of oil, natural gas, or minerals.  The rules implement Section 13(q) of the Exchange Act, which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).

The SEC adopted a two-year transition period so that a resource extraction issuer will be required to comply with Rule 13q-1 and Form SD for fiscal years ending no earlier than two years after the effective date of the final rules.   The final rules were effective March 16, 2021.  Accordingly, the compliance date for an issuer with a December 31 fiscal yearend would be Monday, September 30, 2024 (i.e., 270 days after its fiscal year end of December 31, 2023).

Other Regulatory Initiatives

Proposed rules have also been issued on the following topics in prior years, but final rules have not been adopted:

In 2010 the SEC issued an interpretive release on registrant’s disclosures related to climate change. Public pronouncements indicate the SEC s in the process of formulating updated rules.  In all likelihood any new rule would not be effective for the upcoming proxy season.

The SEC has issued sample comments related to compliance with the interpretive release which should be reviewed when determining compliance with the interpretive release

The 2010 interpretation begins by citing existing SEC rules which can trigger climate change disclosures in the following areas:

  • Description of business
  • Legal proceedings
  • Risk factors
  • Management’s discussion and analysis

The 2010 interpretation then goes on to discuss some of the ways climate change may trigger disclosure required by the current commission rules.

Impact of Legislation and Regulation. Significant developments in federal and state legislation and regulation regarding climate change may trigger disclosure.   Existing federal, state and local provisions which relate to greenhouse gas emissions may require disclosure of any material estimated capital expenditures for environmental control facilities.

Risk factor disclosure may be required regarding existing or pending legislation or regulation that relates to climate change. Registrants should consider specific risks they face as a result of climate change legislation or regulation.

The current MD&A rules, which have been revised since the 2010 interpretation, require disclosure of known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations and any known material trends, favorable or unfavorable, in the registrant’s capital resources.

According to the 2010 interpretation, examples of possible consequences of pending legislation and regulation related to climate change include:

  • Costs to purchase, or profits from sales of, allowances or credits under a “cap and trade” system;
  • Costs required to improve facilities and equipment to reduce emissions in order to comply with regulatory limits or to mitigate the financial consequences of a “cap and trade” regime; and
  • Changes to profit or loss arising from increased or decreased demand for goods and services produced by the registrant arising directly from legislation or regulation, and indirectly from changes in costs of goods sold.

International Accords. Registrants also should consider, and disclose when material, the impact on their business of treaties or international accords relating to climate change. The potential sources of disclosure obligations related to international accords are the same as those discussed above for U.S. climate change regulation. Registrants whose businesses are reasonably likely to be affected by such agreements should monitor the progress of any potential agreements and consider the possible impact in satisfying their disclosure obligations based on the MD&A and materiality principle.

Indirect Consequences of Regulation or Business Trends.

Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for registrants. These developments may create demand for new products or services, or decrease demand for existing products or services. For example, possible indirect consequences or opportunities may include:

  • Decreased demand for goods that produce significant greenhouse gas emissions;
  • Increased demand for goods that result in lower emissions than competing products;
  • Increased competition to develop innovative new products;
  • Increased demand for generation and transmission of energy from alternative energy sources;
  • Decreased demand for services related to carbon based energy sources, such as drilling services or equipment maintenance services; and
  • Adverse impact on the registrant’s reputation.

According to the 2010 interpretation, these business trends or risks may be required to be disclosed as risk factors, in MD&A or the business description.

Physical Impacts of Climate Change.  Significant physical effects of climate change, such as effects on the severity of weather (for example, floods or hurricanes), sea levels, the arability of farmland, and water availability and quality, have the potential to affect a registrant’s operations and results.

Possible consequences of severe weather could include:

  • For registrants with operations concentrated on coastlines, property damage and disruptions to operations, including manufacturing operations or the transport of manufactured products;
  • Indirect financial and operational impacts from disruptions to the operations of major customers or suppliers from severe weather, such as hurricanes or floods;
  • Increased insurance claims and liabilities for insurance and reinsurance companies;
  • Decreased agricultural production capacity in areas affected by drought or other weather-related changes; and
  • Increased insurance premiums and deductibles, or a decrease in the availability of coverage, for registrants with plants or operations in areas subject to severe weather.

According to the 2010 interpretation, registrants whose businesses may be vulnerable to severe weather or climate related events should consider disclosing material risks of, or consequences from, such events in their publicly filed disclosure documents.

Most are familiar with the facts of the crashes of Boeing’s 737 MAX.  Later Boeing stockholders brought a claim that Boeing’s directors failed them in overseeing mission-critical airplane safety to protect enterprise and stockholder value.  The Delaware Court of Chancery issued an opinion that these Caremark claims survived a motion to dismiss.

The Court noted that at the pleading stage, a plaintiff must allege particularized facts that satisfy one of the necessary conditions for director oversight liability articulated in Caremark, either that:

  • the directors utterly failed to implement any reporting or information system or controls; or
  • having implemented such a system or controls, the directors consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.

The Court explained Caremark does not constitute a freestanding fiduciary duty that could independently give rise to liability.  A showing of bad faith is a necessary condition to director oversight liability.  In re Walt Disney Co. Derivative Litigation established that the intentional dereliction of duty or conscious disregard for one’s responsibilities, that is more culpable than simple inattention or failure to be informed of all facts material to the decision, reflects that directors have acted in bad faith and cannot avail themselves of defenses grounded in a presumption of good faith. Accordingly, in order to plead a derivative claim under Caremark, a plaintiff must plead particularized facts that allow a reasonable inference the directors acted with scienter which in turn requires proof that a director acted inconsistently with her fiduciary duties, but also that the director knew she was so acting.

Throughout the opinion the court looked to the precedent in Marchand.  Marchand addressed the regulatory compliance risk of food safety and the failure to manage it at the board level, which allegedly allowed the company to distribute mass quantities of ice cream tainted by listeria. Food safety was the “most central safety and legal compliance issue facing the company.” In the face of risk pertaining to that issue, Marchand noted the board’s oversight function “must be more rigorously exercised.” That, according to the opinion, “entails a sensitivity to compliance issues intrinsically critical to the company.”

Marchand held the board had not made a “good faith effort to put in place a reasonable system of monitoring and reporting” when it left compliance with food safety mandates to management’s discretion, rather than implementing and then overseeing a more structured compliance system. The Court considered the absence of various board-level structures “before the listeria outbreak engulfed the company.” The Court concluded that the complaint fairly alleged several dispositive deficiencies, such as the absence of a board committee that addressed food safety and the absence of a regular process or protocols that required management to keep the board apprised of food safety compliance practices, risks, or reports existed.

The Court concluded that Plaintiffs had carried their pleading burden that the Boeing directors had utterly failed to implement any reporting or information system or controls. According to the Court, like food safety in Marchand, airplane safety “was essential and mission critical” to Boeing’s business, and externally regulated. To support its conclusion, the Court looked to several facts such as:

  • The Boeing Board had no committee charged with direct responsibility to monitor airplane safety.
  • The Board did not monitor, discuss, or address airplane safety on a regular basis.
  • The Board had no regular process or protocols requiring management to apprise the Board of airplane safety; instead, the Board only received ad hoc management reports that conveyed only favorable or strategic information.
  • Management saw red, or at least yellow, flags, but that information never reached the Board.

In addition to the inferences drawn above, the Court found the pleading-stage record supported an explicit finding of scienter.  Here the Court looked to internal emails amongst Board members stating things like “we should devote the entire board meeting (other than required committee meetings and reports) to a review of quality within Boeing,” The Court also noted that the Board knowingly fell short was also evident in the Board’s public crowing about taking specific actions to monitor safety that it had not actually performed.