Share repurchase rules stayed, inching toward vacatur

Our November One-Minute Reads addressed the US Court of Appeals for the Fifth Circuit holding that the Securities and Exchange Commission (SEC) violated the Administrative Procedure Act by adopting final share repurchase rules. The Fifth Circuit held that the SEC acted arbitrarily and capriciously by adopting the new rules, failing to substantiate the new share repurchase rules’ benefits and costs, and applying inconsistent logic. The court did not vacate the rules – instead, it remanded the rules back to the SEC to attempt to repair the defects by November 30, 2023. Following the ruling, on November 22, the SEC announced that it had issued an order postponing the effective date of the share repurchase rules. As a result, the rules have been stayed pending further SEC action. On the same day, the SEC also filed a motion with the court for a time extension to repair the defects, with the plaintiffs opposing the motion.

On November 26, the court issued an order refusing to grant the SEC’s request for an extension, and on December 1, at the request of the clerk of the court, the SEC’s Office of the General Counsel submitted a letter to the court advising that the SEC would not be able to correct the defects by the court-imposed deadline. On December 7, the Chamber of Commerce filed a motion to vacate the SEC’s final share repurchase rules. As recounted by the chamber, the SEC advised the chamber that it took no position on the chamber’s motion. On December 19, acting by a quorum (with one judge recused), the court pulled the plug, issuing an opinion vacating the repurchase rules. At this time, it is not known what action the SEC will take in response to the decision – including whether it will repropose new rules. For the time being, public companies do not need to comply with the proposed share buyback rules included in the SEC’s adopting release.

For more information, refer to this November 22 PubCo post, this December 1 PubCo post, this December 7 PubCo post and this December 19 PubCo post.

Corp Fin releases proxy rules and Schedule 14A C&DIs

In November, the SEC’s Division of Corporation Finance (Corp Fin) released new compliance and disclosure interpretations (C&DIs) addressing issues relating to the proxy rules, including the universal proxy rules in Rule 14a-19. These new C&DIs can be found under the caption Proxy Rules and Schedule 14A. In brief:

1. Q132.03 relates to Rule 14a-12, which permits proxy solicitations before furnishing a proxy statement so long as, among other things, the written soliciting material includes the required participant information or a prominent legend advising shareholders where they can find that information. The C&DI sets forth the content required in this legend in order to rely on this rule.
2. Q139.07 relates to universal proxy and notes that if a shareholder submits an overvoted proxy card, the soliciting party may not use discretionary authority to vote the shares in accordance with its own voting recommendations for director, though they can be voted on other matters and can be counted for purposes of determining a quorum.
3. Q139.08 builds upon the prior C&DI and states that if a shareholder submits an undervoted proxy card, the soliciting party may not use discretionary authority to vote the shares represented by the undervoted proxy card for the remaining director seats up for election.
4. Q139.09 also relates to universal proxy and says that if a shareholder submits a signed but unmarked proxy card, the soliciting party can use discretionary authority to vote the shares in accordance with the soliciting party’s voting recommendations.
5. Q151.02 relates to a situation where a company has closed an acquisition in a transaction that involved partial consideration of convertible securities but did not require shareholder approval and is now seeking shareholder approval for the authorization of additional shares that could be issued on the conversion of the securities issued in the acquisition. The C&DI concludes that the solicitation of shareholder approval for the authorization of the additional shares “is an integral part of the acquisition because it is necessary for the registrant to meet its obligation under the convertible securities issued as consideration for the acquisition,” and therefore that the “proposal to authorize additional shares of common stock ‘involves’ the acquisition” and is a solicitation with respect to the acquisition itself under Note A to Schedule 14A.

Corp Fin also revised Q126.03 relating to Rule 14a-6 to clarify the calculation of the 10 calendar days needed between providing copies of a preliminary and definitive proxy. For more information, refer to this November 20 PubCo post.

Corp Fin posts more pay-versus-performance C&DIs

Also in November, Corp Fin posted new and revised C&DIs addressing issues arising under the final pay-versus-performance rules, codified in Item 402(v) of Regulation S-K. These rules required most public companies to provide a table and accompanying disclosure comparing executive “compensation actually paid” against specified measures of company financial performance beginning in 2023. (See this September 2022 client alert and this September 2022 PubCo post for more information on these rules). Some of the C&DIs revise responses that Corp Fin provided in the February and October pay versus performance C&DIs (see this February 2023 PubCo post and this October 2023 PubCo post).

The new and revised C&DIs address:

• How to calculate peer group total shareholder return (TSR) when using different peer groups in different years (Q128D.07).
• How to treat stock and option awards that allow accelerated vesting if the holder becomes eligible for retirement (Q128D.18).
• Whether to include the dollar value of dividends or dividend equivalents in the calculation of executive compensation actually paid where stock awards entitle the holder to receive these on the underlying shares prior to the vesting date (Q128D.23).
• Which index companies are required to use for their TSR peer group (Q128D.24 and Q128D.25).
• How to calculate peer group TSR when not using a published industry or line-of-business index, including for changes in the peer group (Q128D.26 and Q128D.27).
• How loss of smaller reporting company status impacts a company’s right to provide scaled disclosure (Q128D.28).
• What disclosure a company must provide upon losing emerging growth company status (Q128D.29).
• How to calculate average named executive officer compensation when multiple individuals served as a company’s principal financial officer during a single covered fiscal year (Q128D.30).

For a further summary of all these C&DIs, refer to this November 22 PubCo post.

AI shareholder proposals trending

On October 31, Responsible Investor reported on the filing of the first shareholder proposals relating to artificial intelligence, in a sign of what may become wider practice. Per the article, AI-focused shareholder proposals have been filed or are planned to be filed with six large companies for their next annual meetings. Five of the six proposals submitted by the same shareholder urge companies to publish an AI transparency report on whether they have adopted any ethical guidelines to protect workers, customers and the public from harms related to the use of AI.

DOJ, SEC issue guidance on delaying cyber incident disclosure

As previously reported, the SEC’s final cybersecurity rules include a requirement under new Item 1.05 of Form 8-K to disclose specified information about material cybersecurity incidents within four business days of the company making the determination that the cybersecurity incident was material. The final rules include a narrow allowance for a delayed filing under Item 1.05(c) in cases where the US attorney general has notified the SEC in writing that the disclosure poses a substantial risk to national security or public safety. Initially, this delay would only last for a period of time specified by the attorney general, up to 30 days following the date when the disclosure was otherwise required, though it may be extended for additional time if the attorney general determines that disclosure continues to pose a substantial risk and notifies the SEC in writing. This led to a lingering question of how companies are supposed to bring this issue to the attorney general’s attention. Now, the Department of Justice and SEC have chimed in, with the DOJ publishing the Department of Justice Material Cybersecurity Incident Delay Determinations and the SEC’s Corp Fin issuing four Form 8-K C&DIs.

The DOJ guidelines outline the process that public companies – or federal agencies in coordination with public companies – may use to request that the attorney general authorize delays of cyber incident disclosures required on Form 8-K. The guidelines explore the limited circumstances for finding a substantial risk to national security or public safety, outline the procedures for companies to request a delay in public disclosure, including by contacting the FBI consistent with reporting instructions issued by the FBI, and other procedural matters relating to a delay or change in circumstance during a delay period.

To briefly summarize the C&DIs issued by Corp Fin:

1. Q104B.01 states that if a company requests the attorney general to determine that disclosure of an incident would fall into this exception, but the attorney general declines to make such a determination, or does not respond before the Form 8-K otherwise would be due, the company must file the Item 1.05 Form 8-K within four business days of its determination that the incident is material. Merely requesting a delay doesn’t relieve a company of its filing obligations.
2. Q104B.02 builds upon the prior C&DI and notes that if the attorney general determines and notifies the SEC that disclosure should be delayed, and the company subsequently requests the attorney general to determine that disclosure should be delayed for an additional time period, but the attorney general declines to make such determination, or does not respond before the expiration of the current delay period, the company must file the Item 1.05 Form 8-K within four business days of the expiration of the initial delay period provided by the attorney general.
3. Q104B.03 clarifies that if disclosure of an incident is delayed pursuant to this exception, but the attorney general subsequently determines during the delay period that the disclosure no longer poses a substantial risk to national security or public safety and notifies the SEC of this new determination, the company must file the Item 1.05 Form 8-K within four business days of the attorney general’s notification to the SEC and the company that disclosure of the incident no longer poses a substantial risk to national security or public safety.
4. Q104B.04 notes that merely consulting with the DOJ regarding the availability of a delay under Form 8-K Item 1.05(c) would not necessarily result in a determination that the incident itself is material and therefore reportable under the requirements of Item 1.05(a), as the determination of the materiality of an incident “is based on all relevant facts and circumstances surrounding the incident, including both quantitative and qualitative factors, and should focus on the traditional notion of materiality as articulated by the Supreme Court.”

For more information, refer to this December 14 PubCo post and this December 15 PubCo post.

SEC publishes fall 2023 agenda

The SEC recently published its Fall 2023 Reg-Flex Agenda, which delays some of the most significant pending rulemakings previously targeted for October 2023 to April 2024 – including the climate-related disclosure rules. Some notable rules on the agenda, including in comparison to the spring 2023 agenda (where applicable), include:

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