UNIVERSAL PROXY AND “HORIZONTAL” CONFLICTS – FILLING IN THE (LARGE) DISCLOSURE GAPS
There is reason to believe the SEC’s new universal proxy Rule 14a-19 will result in more stockholder nominees being elected to the boards of public companies.
Bylaw Amendments to Address Universal Proxy Rules
On September 1, 2022, new universal proxy rules adopted by the Securities and Exchange Commission (“the SEC”) formally went into effect. These rules mandatorily apply to public company director elections held after August 31, 2022. This post summarizes the key provisions of Rule 14a-19 of the Securities Exchange Act of 1934, as amended (“Rule 14a-19”), and provides recommendations for potential corporate bylaw amendments.
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SEC Staff Issues Interpretations Relating to the Final “Pay Versus Performance” Disclosure Rules
On February 10, 2023, the Securities and Exchange Commission (the “SEC”) Staff issued a series of Compliance & Disclosure Interpretations (CD&Is) relating to the final “pay versus performance” disclosure rules. These CD&Is cover a range of topics, including use of peer groups, valuation, disclosure of financial performance measures, and presentation of footnotes to the pay versus performance table. As the 2023 proxy season is fast approaching, and calendar-year companies are preparing to finalize initial disclosures, it is important for issuers to review this guidance to ensure no changes need to be made to its draft disclosures.
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Recent Delaware Chancery Court Decision Finds That Corporate Officers Owe the Same Caremark Oversight Duties as Directors
For the past several years, boards of directors have increasingly faced claims that they have failed in their duty of oversight. These so-called Caremark claims can arise in a number of contexts involving allegations of systemic failures or intentional wrongdoing. Recently, the Delaware Court of Chancery held for the first time that officers owe the same duty of oversight as directors, an expansion of Caremark which had previously only been applied to directors.
In In re McDonald’s Corp. Stockholder Derivative Litigation,[1] the Delaware Court of Chancery denied a motion to dismiss a breach of fiduciary duty claim against the former Executive Vice President and Global Chief People Officer of McDonald’s Corporation (“McDonald’s” or the “Company”) relating to alleged sexual misconduct and inadequate oversight.
2022 Amendments to the Delaware General Corporation Law
The Delaware General Assembly recently adopted amendments to the Delaware General Corporation Law (the “DGCL”), effective as of August 1, 2022. Among other changes, the amended DGCL provides for exculpation of officers from liability for breaches of the duty of care and also expands the ability of boards to delegate authority to members of management in connection with the issuance of shares of common stock and options. The change with the most potential for far-reaching impact is with respect to officer exculpation. For existing corporations, a charter amendment is required to take advantage of the new officer exculpation, and it is an open question as to whether shareholders (and proxy advisory firms) will support extending exculpation to officers.
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The SEC Proposes Enhanced Climate Disclosure Rules
On Monday, March 21, 2022, the U.S. Securities and Exchange Commission (“SEC”) released its long-awaited proposed rules on climate-risk disclosures. The proposed rules would amend and build upon existing climate-change disclosure rules and guidance (collectively, the “Proposed Rules”). Under the Proposed Rules, publicly traded companies and other issuers of securities that are required to file a registration statement with the SEC (collectively referred to by the SEC as “Registrants”) would be required to make climate-related disclosures to investors in their registration statements (Forms S-1, S-3, F-1, and F-3) and periodic reports (Forms 10-K, 10-Q, and 20-F).
The Proposed Rules aim to enhance and standardize disclosures on climate-related risks that are likely to have a material impact on a company’s business and financial performance over the short-, medium-, and long-term. The release of the Proposed Rules has triggered impassioned debate, illustrating both strong support for, and fervent opposition to, the proposed climate-related disclosure framework. Thus, any final rules adopted following the comment period could vary significantly from the proposals by the SEC discussed herein.
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Buyers Beware – Aiding and Abetting Claims Based on Target’s Proxy Disclosure
Aiding and abetting claims against a buyer for a target’s breach of fiduciary duties are meant to be rare, given the “long-standing rule that arm’s-length bargaining is privileged and does not, absent actual collusion and facilitation of fiduciary wrongdoing, constitute aiding and abetting . . .”[1] (emphasis added). Yet to survive a motion to dismiss, plaintiff must show only that it is “reasonably conceivable” that buyer “knowingly participated” in the breach of fiduciary duties.[2] This may explain why there were at least three cases last year in which aiding and abetting claims against buyer survived a motion to dismiss.[3]
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Key Takeaways from New SEC Universal Proxy Card Rules – Major Changes Make Activism Easier, Cheaper and Probably More Chaotic
A universal proxy card, listing both company and activist nominees on a single proxy card, will be mandatory for shareholder meetings with contested director elections occurring after August 31, 2022. This will allow shareholders to “split the ticket,” making their own ad hoc selection of board members. By contrast, under the current proxy rules, holders voting by proxy card (rather than in person) must vote for the entire slate proposed by the company or by the activist.
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SEC Guidance on Shareholder Proposals – Staff Legal Bulletin 14L – Is This the Way to Regulate Climate Change?
As a result of the SEC’s most recent Staff Legal Bulletin[1] (“SLB”), shareholder proposals that focus on a “significant social policy” will not be excludable simply because the policy issue is not, in fact, “significant” to the company receiving the proposal. The SEC has decided it will no longer “focus on the nexus between a policy issue and the company.” Previously, shareholder proposals that did not raise a “policy issue of significance for the company” were excludable under the “ordinary course of business” exception to Rule 14a-8.[2] The new Staff Legal Bulletin is a departure from past SEC practice, and led the SEC to simultaneously rescind three previous Staff Legal Bulletins on the same subject.
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SEC Chair Outlines Rulemaking Considerations for Potential New Climate-Related Disclosure Requirement
On July 28, 2021, Securities and Exchange Commission (“SEC”) Chair Gary Gensler, speaking at a webinar titled “Climate and Global Financial Markets,” set forth certain considerations to guide his staff in developing a rule that will require mandatory disclosure on climate risks by the end of 2021.
Up until now, SEC guidelines on climate disclosure were voluntary, resulting in inconsistent disclosure among public companies. In March 2021, the SEC solicited comments from the public on climate change disclosures and, according to Chair Gensler, more than 550 unique comment letters were submitted, three-quarters of which supported mandatory climate disclosure rules. Chair Gensler believes that “consistent, comparable, decision-useful disclosures” would be beneficial to companies and investors alike.