- The SEC adopted final clawback rules last month, here, a mere seven years after they were originally proposed! After publication of the final rules in the federal register (soon), stock exchanges must propose listing standards to require listed company compliance within a year. See the SEC fact sheet here and analysis here, here and here.
- The SEC’s clawback rule adoption is part of the Biden Administration’s modest acceleration of rulemaking toward the end of 2022, which saw the adoption of:
- Rules requiring investment managers to disclose how they voted on public company “say on pay,” here.
- Rules expanding the SEC’s whistleblower program, here.
- Pay versus performance disclosure rules here, which also were seven years in the making. The rules are effective for fiscal years ending after December 16, 2022; summaries are here and here.
- Broker-dealer electronic recordkeeping rules, here.
- Revised proxy advisor rules, here, which generally reverse Trump Administration rules on the topic.
No word on the timeline for final action on the SEC’s proposed climate disclosure rules, here, but there are some rumblings that the rule will be delayed (here) and maybe significantly modified (here).
- Note that the six-month transition period to begin e-filing Forms 144, glossy annual reports, and other items previously filed in paper form, ends on December 10, 2022. See the final rule here.
- A slew of public companies have amended their bylaws to address universal proxy rules, here, intended to rationalize the process for contested director elections. A redline showing proxy rule changes to accommodate universal proxies is here. Bylaw amendments may not be strictly necessary, but universal proxy requirements should at least be coordinated with existing “advance notice” provisions (everyone should have these) and “proxy access” provisions (most large public companies have them, most smaller companies do not). Some are leveraging the new universal proxy rules to make dissident stockholders disclose detail on what they hope to achieve in a proxy battle, among other things; activist push-back against those efforts (and at least one lawsuit) is a thing, see here.
We think bylaws should be modified at least to require a dissident stockholder to deliver to the company:
- Each proposed director’s consent to being named in “a” proxy statement, to ensure the nominee is “bona fide” per Rule 14a-4(c)(5) and (d)(1), and a completed D&O questionnaire in the company’s standard form.
- A representation that the dissident will make a separate proxy solicitation as required by Rule 14a-19 (i.e., to at least 67% of the stockholders within the shorter of five days after the company-filed proxy statement or 25 days before the shareholder meeting date). This may give a clearer path to disqualifying dissident candidates without involving courts and maybe to recovering proxy card reprinting fees or other costs if the dissident fails to comply with Rule 14a-9. (Bylaws might even specify that if the dissident shareholder abandons its proxy solicitation or fails to timely make it, the dissident must pay the costs of recirculating the company’s proxy card.)
We expect that under new Schedule 14a, Item 21(c), companies will disclose in proxy statements that, in lieu of recirculating proxy cards, if the dissident shareholder fails to comply with Rule 14a-19, like by not timely filing its proxy statement, the company will treat votes for the dissident’s nominees as “withhold” or “against” votes on the company’s slate, depending on whether plurality or majority voting standards apply. Perhaps some will bake that treatment directly into their bylaws. (We don’t expect many would take the position that they can reallocate votes to management’s slate—not strictly prohibited, but overreach.)
We suspect the rules won’t result in much of an uptick in proxy contests. It’s still expensive (although not that expensive under the e-delivery model), and dissidents often operate at a disadvantage to the company in any case. We’ll see. Counterpoints and analysis are here and here.
- The SEC also released three new Universal Proxy Compliance and Disclosure Interpretations, 139.01 (dissidents can’t nominate more directors than open seats), .02 (company must inform dissidents of other dissident nominees), and .03 (60-day notice by dissidents is a minimum, advance notice bylaw provisions can require earlier notice), available here.
- ISS guidance about universal proxies is discussed here. (Generally, “pro.”) ISS also posted proposed voting policy changes for 2023, here, and announced 23 new ESG rating updates here.
- On the topic of charter document amendments and proxy matters, Delaware companies should consider updates to capture 2022 changes to Delaware General Corporation Law (see blackline of DGCL changes effective August 1, 2022 here), including:
- Certificate of incorporation amendments to include officer exculpation now permitted by DGCL § 102(b)(7), which trues the risk of serving as a corporate officer to the risk of serving as a corporate director. We expect many of these proposals at upcoming annual stockholder meetings. See commentary here, here, and here.
- Bylaw amendments to capture changes to §§ 219 (stockholder lists) and 222 (adjourned meetings and electronic notice), although these are required or default provisions under the DGCL, so you need not update if existing bylaw provisions do not cover these areas.
Additional sources re the DGCL changes are here, here, and here.
- The 2022 report on SEC enforcement actions is available here, and analysis is here. Recall also cautions about stepped-up SEC scrutiny of Rule 10b5-1 plans (e.g., here, here, and here) and that the SEC earlier proposed Rule 10b5-1 changes (here). As always, it’s useful to treat SEC enforcement priorities as a touchstone for corporate governance practices and internal compliance focus.
- And just to terrify you more, CFIUS released guidance on enforcement penalties here (summary here).
- Disclosure isn’t just for publicly traded companies, as the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department reminded us when it adopted final rules, here, required by the Corporate Transparency Act (here) that implement beneficial ownership reporting for most legal entities formed in the U.S. Summaries are here, here, and here.
- Unless you’ve been living on Mars, you know that Elon Musk completed his purchase of Twitter on the eve of resumption of Twitter’s lawsuit against him. For all the ink spilled since Musk announced the purchase, tried to cancel it, failed to renegotiate it, and then completed it, at the end of the day the M&A legal lessons are merely these: binding agreements are binding; proving a “material adverse change” is still tough in Delaware after Akorn v. Fresenius (2018), here.
Three weeks in, it’s still unclear how Musk expects to underpants-gnome his way to making Twitter profitable, but simultaneously soothing advertisers and tweeting weirdo conspiracy theories was an odd way to start. Musk is erratic and appears plan-less, a plus to those irrationally drawn to bombast, but to others it makes his self-designation as “Chief Twit” seem more unnecessary than amusing. (And to leave no doubt, this.)
The MAGA set has simultaneously delighted in Musk’s mass firing of Twitter employees (spoiled!) and heralded the purchase as a triumph of free speech, for some reason. (For the MAGA set, see here but definitely not here.) Liberal celebrities have bravely declared they will no longer post random thoughts or shill for products on the platform. For some, watching the drama is likely more fun than contemplating the reality that Twitter is likely a sinkhole that will slowly drain some of Musk’s resources (but maybe not that slowly, here). For us, the nonstop news coverage makes us pine for the days when Googling “Musk disaster” merely yielded results like this and this.
- And speaking of free speech, but mostly just for fun, check out:
- The greatest Amicus Curiae brief in support of a petition for a writ of certiorari you will ever read (a high bar indeed), here.
- A missive from the “upside down” of free speech in Florida, here.
- And finally, in non-FTX cryptocurrency news, we were amused to see this and to imagine how cool it must have felt for regulatory nerds to go after Kim Kardashian.
