2022 Proxy Season – Shareholder Proposal Review

Thomas P. Skulski is Managing Director – Proxy and Glenn O’Brien is an Analyst at Morrow Sodali. This post is based on their Morrow Sodali memorandum.

In late 2021 the SEC announced that it would take a new approach to the economic relevance and ordinary business exemptions through the no-action process. This led to the SEC allowing fewer shareholder proposals to be omitted by issuers, and the first half of 2022 saw a significant increase in shareholder proposals that went to a vote.

A total of 538 shareholder proposals reached a vote in the first half of 2022. This is a significant increase from 385 in the first half of 2021. Of note, this increase in volume did not coincide with an increase in the number of proposals that received a majority vote. In 2021, 76 proposals received a majority vote, compared to 73 in 2022.

Governance, social and environmental proposals all increased in volume in 2022. Most notably, social proposals increased from 99 to 215 year over year, making up 39% of all shareholder proposals. Governance proposals made up just under half of the total shareholder proposals, which is a drop from 59% in 2021. Environmental proposals made up approximately 15% of all shareholder proposals in both 2021 and 2022.


Know Your Customer: Informed Trading by Banks

Rainer Haselmann is Professor of Finance, Accounting, and Taxation at Goethe University Frankfurt, Christian Leuz is Charles F. Pohl Distinguished Service Professor of Accounting and Finance at the University of Chicago Booth School of Business, and Sebastian Schreiber is Professor of Finance , Accounting and Taxation at Goethe University Frankfurt. This post is based on their recent paper.

Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation (discussed on the Forum here) by Jesse M. Fried.

Since the implementation of the Glass-Steagall Banking Act of 1933 concerns about combined banking operations, i.e., commercial and investment banking within the same universal bank, faded. Notwithstanding, the Global Financial Crisis in 2008 reinvigorated the debate about separating commercial and investment banking, resulting in the Volcker Rule and general requirements for ethical walls. In particular, universal banks could use borrowers’ confidential information when selling securities to investors or trading in capital markets. Despite the persisting political and scholarly debate, it is surprising how little we know about banks’ use of private information and banks’ proprietary trading in general. One reason is that internal information flows cannot be directly observed, and proprietary trading data is not readily available.

This study aims to demystify information transmission within universal banking systems. We combine detailed German data on banks’ proprietary trading with lending data, both provided by German supervisory agencies. Due to the granularity of our data, we are for the first time able to identify instances when banks likely make informed trades in their borrowers’ stocks. Focusing on banks’ trades in stocks of their clients around important corporate events, we find that relationship banks build up positive (negative) trading positions in the two weeks before events with positive (negative) news. This is particularly true when these events are unscheduled, and banks unwind positions shortly after the event. This finding is remarkable, as it should be more difficult to build positions in the ‘right’ direction ahead of unscheduled events.


Section 220 Decisions Amplify Stockholders’ Rights to Inspect Books and Records

Gail Weinstein is Senior Counsel and  Scott B. Luftglass and Peter L. Simmons are Partners at  Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Luftglass, Mr. Simmons, Mr. Epstein, Mr. Richter, and Mr. Mangino, and is part of the Delaware law series; links to other posts in the series are available here.

In recent years, the Court of Chancery’s docket increasingly has been occupied with Section 220 actions by stockholders seeking to inspect corporate books and records to investigate possible corporate wrongdoing or mismanagement. In part to curtail premature or frivolous litigation, the Court of Chancery has encouraged stockholders to conduct such investigations before deciding whether to bring litigation. Stockholders have heeded this call, and in many cases the information obtained through a Section 220 investigation has provided a basis for more particularized allegations, which has resulted in more cases surviving the pleading stage of litigation than in the past (particularly in the Corwin, MFW and Caremark contexts). At the same time, the Delaware courts have been wrestling with the proper contours of stockholders’ rights in Section 220 cases. In this Briefing, we discuss the three most recent Section 220 decisions and offer related practice points.

The Most Recent Section 220 Decisions

  • In NVIDIA v. Westmoreland (July 19, 2022) [1], the Delaware Supreme Court upheld the Court of Chancery’s ruling that hearsay evidence (if reliable) can be used by stockholders in a Section 220 proceeding not only to show the requisite “credible basis” (which Supreme Court precedent already had established) but also to show the requisite “proper purpose.”
  • In Hightower v. SharpSpring (Aug. 31, 2022) [2], after the company provided formal board materials in response to a Section 220 demand relating to the company’s sale process, the Court of Chancery ordered the production of additional documents in light of the failure of the stockholder disclosure regarding certain key events to “match up” with the board minutes.
  • In Rivest v. Hauppauge Digital (Sept. 1, 2022) [3], the Court of Chancery, emphasizing that there is no “presumption of confidentiality” for documents produced in response to a Section 220 demand, rejected the company’s request for confidentiality that was based only on a “standard” concern (that all companies would have) about use of its information by competitors.


How cyber governance and disclosures are closing the gaps in 2022

Chuck Seets is Americas Assurance Cybersecurity Leader and  Pat Niemann is Americas Audit Committee Forum Leader at EY. This post is based on their EY memorandum.

Cybersecurity is reaching an inflection point. Risks are growing and broader regulations are looming. Some companies are keeping pace, but others are lagging, both in disclosures and warding off threats. To close these gaps, directors should foster a culture of cooperation while elevating the tone at the top.

This is the year for directors to double down on closing the gaps in the company’s cybersecurity defense and disclosure practices. The risks companies face, already high, are multiplying and accelerating, marked this year by potential threats tied to the war in Ukraine. Meanwhile, more guidance on cyber oversight and disclosure is here or on its way, from the Securities and Exchange Commission (SEC or commission), which proposed new rules earlier in 2022; and from Congress, which recently passed far‑reaching legislation. Additionally, Institutional Shareholder Services Inc. (ISS) added 11 new cyber risk factors to its Governance QualityScore in 2021.

In our latest analysis of cyber‑related disclosures in the proxy statements and Form 10-K filings of Fortune 100 companies, we found more companies providing information about how they are rising to the challenges. Yet in some areas, the gaps in information are nearly universal. For instance, only 9% disclosed performing response readiness simulations.


Stock Buyback Tax Raises Questions as to Application and Practical Effect

Joe Soltis, Claude Stansbury, and Robert Scarborough are partners at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Mr. Soltis, Mr. Stansbury, Mr. Scarborough, Sarah Solum, and Daniel Fox. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Jesse M. Fried and Charles C.Y. Wang (discussed on the Forum here); and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay by Jesse M. Fried (discussed on the Forum here).

On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (the “IRA”) into law. Although far from the sweeping tax reform that the Biden Administration had originally envisioned, one provision from the previously proposed “Build Back Better Act” that was included in the IRA is a new 1% non-deductible excise tax on stock repurchases by publicly traded U.S. corporations (the “Buyback Tax”).

Overview of the Buyback Tax

The Buyback Tax applies, with certain exceptions, to stock buybacks and other transactions effected after December 31, 2022 that are treated as redemptions for tax purposes. A corporation is generally treated as redeeming its stock if it acquires such stock from a shareholder in exchange for property (other than its own stock or rights to acquire its own stock), regardless of whether the stock is cancelled, retired, or held as treasury stock. Corporations subject to the Buyback Tax (“covered corporations”) include publicly traded U.S. corporations and publicly traded foreign corporations that have undergone certain “inversion” transactions since September 20, 2021. Repurchases by 50%-owned subsidiaries of a covered corporation are generally treated as having been made by the covered corporation itself. Foreign public companies, including foreign private issuers that are listed on U.S. exchanges, are generally not subject to the Buyback Tax, although a purchase by certain U.S. subsidiaries of a foreign public parent company’s stock may be subject to the Buyback Tax (with certain modification).

The Buyback Tax does not apply to stock repurchases (i) that are part of a tax-free reorganization in which the redeemed shareholder does not recognize gain or loss, (ii) where the redeemed stock (or stock of an equal value) is contributed to an employer-sponsored retirement plan, employee stock ownership plan, or a similar plan, (iii) effected by a real estate investment trust (REIT) or regulated investment company (RIC), or (iv) to the extent treated as dividends for tax purposes. A de minimis rule exempts covered corporations that repurchase less than $1 million of their stock during a given taxable year, and the U.S. Department of the Treasury (“Treasury”) is directed to issue regulations that exempt certain repurchases by securities dealers. READ MORE »

The Irrelevance of Delaware Corporate Law

Robert J. Rhee is John H. and Marylou Dasburg Professor of Law at the University of Florida Levin College of Law. This post is based on his recent paper, forthcoming in the Journal of Corporation Law, and is part of the Delaware law series; links to other posts in the series are available here.

Is Delaware corporate law relevant? Relevance is a relational concept. Relevant to what? Rules of corporate law are considered in efficiency’s light. Efficient laws should enhance firm value. Is Delaware law more efficient than the laws of other states such that we should see a “Delaware premium”? Do inter-state differences in corporate law matter?

The idea of a “race” for quality has commanded the attention of scholars since the Cary–Winter debate. It is central to the question of federalism in corporate law. The advocates of Delaware law accept the view that it represents the product of a race to the top. But suppose the “race” is a figment of our theoretical imagination. Suppose there is no evidence of a Delaware valuation premium. If so, under the generally accepted measure of quality (efficiency and firm value), corporate law would be irrelevant. A much smaller camp in the academic debate has argued that corporate law is “trivial.” In The Irrelevance of Delaware Corporate Law, 48 J. Corp. L. (forthcoming 2022), I provide empirical support for the hypothesis that, despite the law’s purported aspiration for efficiency, inter-state differences in state corporate law have no basis in efficiency.


Weekly Roundup: September 23-29, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of September 23-29, 2022.

Boards Need More Women: Here’s How to Get There

How Compensation Decisions Support CEO Succession

Battle for Our Souls: A Psychological Justification for Corporate and Individual Liability for Organizational Misconduct

Empowering Corporate Compliance Functions in a Post-Pandemic Environment

Making it Count: Accountability is Needed to Fast-Track DE&I

The Market for Corporate Criminals

Clawback Policies: Evolving Market Norms and SEC Rules

Planning for Tomorrow’s Public Company CFO

5 Factors Impacting Activists’ Declining Success Rate

Kurt Moeller is a Managing Director at FTI Consulting Inc. This post is based on his FTI memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch; and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System (discussed on the Forum here) by Leo E. Strine, Jr.

In the 2021 and 2022 proxy seasons, shareholder activists taking proxy contests all the way to a vote have won at least one board seat far less often than during the previous four years. Why is this the case? One reason is that influential proxy advisors Institutional Shareholder Services (“ISS”) and Glass Lewis (“Glass Lewis”) each have been much less likely to recommend that shareholders vote for the activist slate. This shift by ISS and Glass Lewis appears partly due to broad macro factors. At the same time, those proxy advisors’ recommendations have offered specific critiques of activists’ campaigns that suggest how activists can alter their approaches to achieve more success.

FTI Consulting examined proxy contests in which the underlying campaign sought board seats at U.S. companies with market capitalizations of at least $100 million and where ISS and Glass Lewis published voting recommendations. From 2017 through 2021, each year saw between 12 and 15 such proxy contests; the first half of 2022 had 14 contests. While small sample sizes in any year can magnify differences in results, a longer-term look suggests a definite trend.

From 2017 through 2020, activists won at least one board seat in 57% of these contests. That figure falls to 23% since January 1, 2021, including 29% during the first half of 2022. From 2017 through 2020, ISS and Glass Lewis both recommended that shareholders vote on the activist proxy card in 59% of situations, a figure which has plunged to 23% since 2021 began.


Planning for Tomorrow’s Public Company CFO

Linda Barham, Nicole Salama, and Esmerelda Popo are consultants at Russell Reynolds Associates. This post is based on an RRA memorandum by Ms. Barham, Ms. Salama, Ms. Popo, and Catherine Schroeder.

Over the past decade, the public company CFO remit has rapidly evolved beyond the traditional financial scope to include operational and strategic responsibilities. To stay abreast and develop your finance talent as the role continues to evolve, understanding tomorrow’s CFO is paramount.

To better understand the current state of the role and hiring implications, Russell Reynolds Associates recently analyzed the backgrounds, career paths, and tenures of S&P 500 CFOs (N = 500). [1] Based on our findings, we identify three important trends in how CFO appointments have evolved over the years, as the war for talent continues.

  1. High turnover leads to an extremely active market
  2. Recent strides have been made in promoting women CFOs
  3. The S&P 500 landscape is shifting towards strategically-oriented CFOs

Finally, we also review key considerations for CEOs, Boards, and CFOs as they continue to hire and develop their finance talent.

1. An active CFO market has companies forgoing traditional requirements

Over half of S&P 500 CFOs were hired into their role within the past three years. This high churn rate is the result of many factors, including a frothy IPO market in 2021 that significantly increased the number of public company CFO opportunities, as well as overall strong equity performance that allowed some to retire earlier. [2] While recent market slowdowns have slightly cooled the war for talent, increasing retirement rates and the ongoing search for talent from historically unrepresented minority groups, point to a CFO market that is far from stagnant [3] (To read more about CFO turnover in 2022, see our latest research.)


Clawback Policies: Evolving Market Norms and SEC Rules

Subodh Mishra is Global Head of Communications at Institutional Shareholder Services, Inc. This post is based on an ISS Corporate Solutions publication by Jun Frank, Managing Director, Advisory, and Paul Hodgson, Senior Editor, at ISS Corporate Solutions.

Related research from the Program on Corporate Governance includes Rationalizing the Dodd-Frank Clawback (discussed on the Forum here) by Jesse M. Fried.

Key Takeaways

  • SEC expected to release revised rules on clawback policies in October
  • Comments focused on how to categorize restatements based on impact
  • Clawback policies are already the market norm in most industries
  • Health Care has one of the lowest adoption rates for clawback policies
  • New rules may prompt companies to re-examine the scope of their policies

The Securities and Exchange Commission is poised to revise its rules on so-called clawbacks: the process of recovering incentive compensation from current and former executives when a company is forced to make a material restatement of its accounts. With a target of releasing its revisions in October, the SEC has twice reopened public comment periods on proposals that it first advanced in 2015 to implement part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The regulator also added 10 new policy questions along with a memorandum that addressed two matters: the voluntary adoption of clawback policies by companies and whether clawbacks should apply to restatements of lesser significance, known as “little r,” as well as those that have a meaningful material impact “Big R.”


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