Season-end Summary of Challenges under Rule 14a-8

Neil McCarthy is Co-Founder and Chief Product Officer, G. Michael Weiksner is Co-Founder and Chief Technology Officer, and James Palmiter is CEO and Co-Founder at DragonGC. This post is based on a DragonGC memorandum by Mr. McCarthy, Mr. Weiksner, Mr. Palmiter, Jennifer Carberry, Natalie Richardson, and Evan Quille.

The SEC has just completed its oversight role for the 2023/2024 season over challenges brought by companies to exclude proposals submitted by their shareholders per Rule 14a-8. What follows is a summary of the results for this season with comparisons to the 2022/2023 season.

Under Rule 14a-8, companies generally must include shareholder proposals in their proxy statements to be considered at the annual meeting. The rule, however, provides several bases for exclusion, including 13 substantive requirements that proposals must comply with to avoid exclusion – Rule 14a-8(i)(1) to (i)(13) – as well as procedural requirements for when and how they must be submitted to the companies by shareholders. The rule has a process for how companies can seek to exclude these proposals by submitting a challenge to the SEC to obtain a favorable ‘no-action letter.’


Ethical Investments

Yifat Naftali Ben Zion is a Fellow at Harvard Law School’s Program on Corporate Governance and an Assistant Professor at Tel Aviv University Faculty of Law (as of July 2024). This post is based on her recent working paper.

In recent years, significant developments have occurred in the market for socially responsible investing, also known as ESG (environmental, social, and governance) investments. However, despite its rapid growth, the market has lately faced setbacks, including various regulatory initiatives, such as those in Florida, aimed at blocking the consideration of ESG factors in investment decisions. These trends could be expected to also reach the courts, as demonstrated by a decision last March in Texas, where an ESG backlash lawsuit survived a dismissal motion.

While there is no shortage of writing that deals with the subject of ESG investments, a crucial legal question that stands at the heart of these debates still lacks a satisfying answer: Does the law allow institutional investors to consider ESG factors when making investment decisions? With trillions of dollars in global corporate equity, institutional investors potentially wield significant influence. However, these institutions are subject to a strict set of legal rules, bound by fiduciary duties that govern their investment decision-making.


ESMA Guidelines on ESG-related Fund Names

Gregg Beechey and Zac Mellor-Clark are Partners and Nishkaam Paul is an Associate in Fried Frank’s Asset Management Practice Group. This post is based on their Fried Frank memorandum.

Following in the footsteps of similar initiatives by regulators in other jurisdictions, including the SEC’s recent tightening of investment company name requirements and the FCA’s rules around names and the marketing of investment products introduced as part of its Sustainability Disclosure Requirements and investment labelling regime, the European Securities and Markets Authority (“ESMA”) published its final Guidelines on funds’ names using ESG or sustainability-related terms (the “Guidelines”) on 14 May 2024.

The Guidelines reflect ESMA’s view, and the European legislative and supervisory authorities’ view more generally, that the name of a fund is a key element in communicating information about that fund to prospective investors and an important marketing tool for the fund.


How Do Companies Monitor Stakeholder Grievances?

Subodh Mishra is Global Head of Communications at ISS STOXX. This post is based on an ISS-Corporate memorandum by Elias Siebert.

While responsible business conduct has long been a focus for activists, special interest groups and the socially responsible investment movement, in recent years, more stakeholders are recognizing the importance of global norms for responsible business conduct to prevent and mitigate adverse impact. Governments around the world are demanding more comprehensive disclosures from companies and their investors, creating a feedback loop that increases the focus on these topics.

Monitoring the implementation of responsible business conduct standards across a company’s own operations and along the value chain can prove difficult. For the past several decades, corporate sustainability has been shaped by a variety of global standard-setting initiatives. Many voluntary frameworks are now being incorporated into regulation at the national or regional level. Legal frameworks largely focus on disclosure, yet a growing number of regulatory initiatives also introduce sustainability due diligence obligations.


Special Litigation Committees in Caremark Cases

Roy Shapira is a Professor of Law at the Reichman University Harry Radzyner Law School and a Research Member at ECGI. This post is based on his recent paper forthcoming in the Indiana Law Journal.

Today, virtually every corporate fiasco is followed by an oversight duty lawsuit against the company’s directors and officers for not doing enough to prevent the debacle. But the rapid resurgence of oversight duties has created a mismatch: the doctrine has become one of the most important in corporate law yet remains underarticulated.

In a new Article I try to bridge this mismatch by conceptualizing the doctrine (often dubbed Caremark, after Delaware’s leading precedent). The standard of liability across all types of oversight duty claims is bad faith. Failure-of-oversight claims thus usually boil down to what courts can infer about directors’ mental state from external evidence about directors’ actions and the circumstances in which they took them. The Article identifies the external “markers” that courts use to infer directors’ bad faith in each type of Caremark claim. The Article then articulates the main policy arguments behind each Caremark claim, namely, combatting “willful blindness,” “cosmetic compliance,” corporate recidivism, and managerial short-termism.


DOJ Strengthens Incentives to Report Corporate Misconduct

Carolyn Small is Special Counsel, Paige Zielinski is an Associate, and Brandon Fox is a Managing Partner at Jenner & Block LLP. This post is based on a Jenner & Block memorandum by Ms. Small, Ms. Zielinski, Mr. Fox, Laurel Loomis Rimon, David Bitkower, and Anthony Barkow.

Just over a month after Deputy Attorney General Lisa Monaco announced the upcoming launch of the Department of Justice’s whistleblower rewards program, the DOJ Criminal Division unveiled its newest program to incentivize disclosure of alleged corporate wrongdoing: the Pilot Program on Voluntary Self-Disclosures for Individuals. The launch of this program is the latest in a string of new programs that are designed to incentivize individuals to report corporate wrongdoing and cooperate with the government when it investigates and prosecutes companies for certain criminal violations. Below, we provide an overview of the new program and criteria for participation, and discuss the government’s growing emphasis on encouraging self-disclosures and implementing whistleblower programs to identify potential criminal violations by public and private companies.


Compensation Consultants and CEO Pay Peer Groups

Woon Sau Leung is Professor of Finance at the University of Southampton Business School. This post is based on a working paper by Professor Iftekhar Hasan, Professor Leung, and Dr. Stefano Manfredonia.

Academics have long been interested in understanding whether pay packages for CEOs are efficiently designed. Research under the “efficient contracting” view believes high pay reflects a premium for managerial talents, human capital, and/or other non-monetary benefits. On the other hand, another strand of the literature argues that the pay-setting process is inefficient, as CEOs can extract rent by exercising their power over the board of directors and driving pay up.

Increasing attention has been paid recently to compensation consultants and their role in the ever-rising CEO pay. Most large corporations today employ compensation consultants who offer a range of services to their clients, including compensation structuring, incentives, actuarial analysis, and human resources support. Many believe that these consultants can contribute to making CEO pay settings more efficient due to their industry expertise and informational advantages. However, some acknowledge that consultants may have an incentive to secure new or repeat business and cross-sell other services. Such conflicted interests may lead them to favor incumbent management and be overly generous in their pay recommendations.


Sustainability Board Preparedness in Large Family Businesses

Frederik Otto is Executive Director and Michael Reed is Director and Senior Advisor of the Institute for Sustainable Family Business at The Sustainability Board (TSB). This post is based on their TSB memorandum.

In 2019, when we began our reporting cycle, a mere 54 of the 100 largest global companies had clearly defined sustainability oversight, with 16% of directors being ESG-engaged. After seeing only modest gains in 2020, we wanted to understand how different ownership structures might affect sustainability preparedness of boards.

Our special report on publicly traded family business in 2020 revealed that sustainability oversight was lagging behind in comparison to our default sample of the Top 100 Forbes 2000 which contains mainly non-family businesses. However, directors on family boards were twice as likely to be engaged on sustainability than those in our default sample.


Alternative Asset Manager Governance & Succession

Adam Fleisher, Michael J. Albano, and Alan M. Levine are Partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Fleisher, Mr. Albano, Mr. Levine, and Anirudh Sivaram.

As founders of hedge funds and private equity funds approach retirement, it is critical for them to ensure institutional stability through well-considered succession plans and governance arrangements. Failure to properly prepare for the transition to the next generation can result in severe business instability or even a firm’s demise.  This is a brief overview of key issues to consider in thinking about these topics.

1. Economics. Very often a founder holds a substantial portion of firm economics. When the founder transitions to a more inactive role or full retirement, the transition can result in correspondingly less equity being available to compensate the remaining active partners and employees or to achieve other corporate development goals (e.g., stock-based acquisitions).


Board Gender Diversity and Investment Efficiency: Global Evidence from 83 Country-Level Interventions

Dave (Young Il) Baik is an Assistant Professor at Nanyang Technological University, Clara Chen is the Lillian and Morrie Moss Distinguished Professor in Accountancy at the University of Illinois in Urbana-Champaign, and David Godsell is a PricewaterhouseCoopers Faculty Fellow and Assistant Professor at the University of Illinois in Urbana-Champaign. This post is based on their recent article published in The Accounting Review.

Regulators worldwide are responding to increasing demand for gender diversity on corporate boards by experimenting with policy interventions intended to increase female representation among board directors. In our recent article titled, “Board gender diversity and investment efficiency: Global evidence from 83 country-level interventions”, we catalog, for the first time, 83 country-level board gender diversity (BGD) interventions in 59 countries between 1999 and 2021. The average intervention in our catalog significantly increases female representation on corporate boards. The average post-intervention increase in BGD, measured as the quotient of female board directors divided by the total number of board directors, is 7.3 percentage points.

We employ our novel catalog of 83 board gender diversity interventions to examine the effect of BGD on a first-order firm outcome: investment efficiency. We examine the efficiency of investment because investment is the most important driver of firm value and impacts the broader economy and society, determining both firm and country growth over time.

The effect of BGD on investment efficiency is an open question.


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