SEC Proposes Narrowing Grounds for Excluding Shareholder Proposals

Richard Alsop, Harald Halbhuber, and Lona Nallengara are partners at Shearman & Sterling LLP. This post is based on a Shearman memorandum by Mr. Alsop, Mr. Halbhuber, Mr. Nallengara, Meaghan Jerrett, Alexa Major, and Ryan Robski.

On July 13, 2022, the Securities and Exchange Commission (the “SEC”) proposed revisions to Rule 14a-8 under the Securities Exchange Act of 1934 to amend certain substantive bases on which U.S. public companies can exclude shareholder proposals from their proxy statements. The proposed amendments would make it harder for companies to exclude shareholder proposals based on the following three substantive bases for exclusion: substantial implementation, duplication and resubmission.


Under Rule 14a-8, a company must include an eligible shareholder’s proposal in its proxy statement and bring it up for a vote at its shareholder meeting if the proposal meets certain procedural and substantive requirements. The rule has become a fundamental component of shareholder engagement, allowing shareholders to raise important topics for consideration at the annual meeting and to successfully advance certain corporate governance objectives, but has also created a corresponding burden for companies that are subject to numerous proposals that never achieve majority support.

First adopted in 1942, Rule 14a-8 has been the subject of various revisions, with the most recent significant amendments adopted in 1983. More importantly, Rule 14a-8 has been the subject of extensive SEC staff interpretive guidance through no-action letters that have served to define the scope of the procedural and substantive requirements and a number of Staff Legal Bulletins that have served, in part, to crystallize the Staff’s current thinking. [1]


Back to Basics: Board Committees

Natalie Cooper is Senior Manager and Robert Lamm is an independent senior advisor, both at the Center for Board Effectiveness, Deloitte LLP; and Randi Val Morrison is Vice President, Reporting & Member Support at the Society for Corporate Governance. This post is based on their Deloitte/Society for Corporate Governance memorandum.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) Stakeholder Capitalism in the Time of COVID (discussed on the Forum here), both by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.

Topics such as cybersecurity, human capital, climate, and political contributions that are associated with the seemingly limitless umbrella of “environmental, social, and governance” (ESG) are becoming standing items on many board agendas. This growing and ever-evolving list of issues that companies are expected to effectively manage is causing many boards to consider what it may mean for their oversight role and how to maintain and/or enhance oversight effectiveness. For many boards, this means taking a fresh look at their committee structure and practices to determine whether they are keeping pace with the board’s expanding and changing responsibilities and priorities or whether any changes may be warranted, such as adding new committees; revising committee charters; reallocating oversight delegation across the board and its committees; or modifying committee meeting formats (e.g., frequency or length).

This post presents findings from a May 2022 survey of Society for Corporate Governance members representing nearly 180 public companies. The intent of the survey was to understand current board committee structure, composition, and related practices, and how some of these practices have evolved over the past year.


Respondents, primarily corporate secretaries, in-house counsel, and other in-house governance
professionals, represent public companies of varying sizes and industries. [1] The findings pertain to these companies and where applicable, commentary has been included to highlight differences among respondent demographics. The actual number of responses for each question is provided.

Access results by company size and type.


Amendments to Form 13F

Stephen P. Wink is partner and Naim Culhaci is an associate at Latham & Watkins LLP. This post is based on a Latham memorandum by Mr. Wink, Mr. Culhaci, Jackie Rugart, and Matthew Lee.

On June 23, 2022, the Securities and Exchange Commission (SEC) adopted certain amendments to Form 13F (the Adopting Release) that will become effective at the beginning of 2023.

Eliminating Paper Filing and Mandating Electronic Filing for Confidential Treatment Requests

Pursuant to Section 13(f) of the Securities Exchange Act of 1934 (the Exchange Act) and Rule 13f-1 promulgated by the SEC thereunder, institutional investment managers (Managers) that exercise investment discretion over at least US$100 million of “section 13(f) securities” (i.e., in general terms, US exchange-listed equity securities and options) are required to publicly disclose their positions in section 13(f) securities as of the end of each calendar quarter on a Form 13F filing that is due 45 days after the end of such quarter.

Pursuant to Section 13(f) of the Exchange Act and the Freedom of Information Act, the SEC permits Managers to submit “confidential treatment requests” whereby they can seek permission from the SEC to omit for up to one year from their Form 13F filings certain positions that constitute “confidential, commercial or financial information” by demonstrating to the SEC that prematurely disclosing the position to the public on Form 13F would reveal ongoing investment strategy to competitors and cause substantial harm to competitive position.


SEC Expects to Issue Final Clawback Regulations by October ’22

Mike Kesner and John Ellerman are partners at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes Rationalizing the Dodd-Frank Clawback (discussed on the Forum here) by Jesse Fried.

Introduction and Background

The U.S. Congress approved the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010. One of Dodd-Frank’s key executive compensation provisions requires that all listed companies adopt and disclose a policy for the recoupment of incentive compensation, from its current and former executive officers, in the event a company is required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under the securities law (colloquially referred to as a “clawback” policy). The amount subject to clawback is “equal to any incentive compensation received during the three-year period preceding the restatement in excess of what would have been paid the executive officers under the accounting restatement.”

In July 2015, the Securities and Exchange Commission (SEC) issued proposed rules requiring that listed companies adopt and disclose a clawback policy as required under Dodd-Frank. The proposed rules lay dormant, however, until October 2021, when the SEC reopened the comment period for the original rules along with 10 new policy questions—the most significant of which was the extension of clawbacks to corrections of errors in prior financial statements that are not material enough to require the reissuance of those statements.

On June 9, 2022, the SEC reopened a new 30-day comment period along with a memorandum prepared by the SEC’s Department of Economic and Risk Analysis (DERA). DERA’s memorandum provided detailed information on (1) the increase in voluntary adoption of compensation recovery policies by companies and (2) estimates of the number of additional restatements that would be subject to the clawback rules if the proposed rules were to include restatements due to material noncompliance (“Big R” restatements) and corrections of errors (“little r” restatements). The memorandum opines that many existing clawback policies do not comply with the Dodd-Frank requirements and most “little r” restatements do not affect net income; therefore, they are unlikely to result in a sharp increase in clawback activity. The memorandum also states that extending clawbacks to “little r” restatements will help improve the accuracy of financial reporting, especially among smaller issuers.


Chancery Decision Expands the Court’s Approaches on Director Independence

Gail Weinstein is Senior Counsel, and Steven J. Steinman and Brian T. Mangino are Partners at Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Steinman, Mr. Mangino, Matthew V. SoranRandi Lally, and Mark H. Lucas, and is part of the Delaware law series; links to other posts in the series are available here.

Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders (discussed on the Forum here) by Lucian Bebchuk and Assaf Hamdani.

The Goldstein v. Denner (May 26, 2022) litigation arose out of the $11.6 billion cash acquisition of Bioverative, Inc. (which had recently been spun off from Biogen, Inc.) by Sanofi, S.A. The Delaware Court of Chancery held, at the pleading stage of litigation, that certain directors and officers of Bioverative may have breached their fiduciary duties in connection with the sale process. The plaintiff claimed that the defendant directors and officers sold the company (in a single-bidder process) too quickly after the spinoff; at a price far below the company’s stand-alone value (as indicated by the company’s projections prepared in the ordinary course of business); at a time when the universe of potential buyers was limited (due to tax-related restrictions following the Spinoff not expiring for another few months); and with materially inaccurate and misleading disclosure to the stockholders.

The sale process was led by an outside director, “D,” an activist investor, who allegedly was acting in accordance with his “usual playbook” of pressuring a public company into putting him on the board, then recruiting his “supporters” onto the board, and then forcing a near-term sale of the company. In this case, allegedly, he had “supercharged” the process by having the hedge fund he controlled (the “Fund”) buy a significant stake in the company after Sanofi first approached him about its in interest in acquiring the company, and then waiting until the expiration period for disgorgement of short-swing profits under Section 16(b) of the Exchange Act to inform the board of Sanofi’s interest and initiate the sale process.

In an opinion that clarifies, and arguably expands, the court’s current approaches on important topics, Vice Chancellor Laster found, at the pleading stage of litigation, that it was “reasonably conceivable” (the standard for survival of claims at the pleading stage) that all of the defendant directors and officers committed unexculpated breaches of their fiduciary duties in connection with the sale process. The court reserved judgment for a future decision on the claim that D’s Fund aided and abetted D’s alleged fiduciary breach.


Weekly Roundup: July 29-August 4, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of July 29-August 4, 2022.

Board Effectiveness and the Chair of the Future

Regulatory Instability for Proxy Advisory Firms

A New Chapter in Cyber

The Single-Owner Standard and the Public-Private Choice

Sale of Portfolio Company is Subjected to Entire Fairness Review

Putting Financial Reporting Standards Into Practical Perspective

The Expanded Role of the Compensation Committee

West Virginia v. EPA Casts a Shadow Over SEC’s Proposed Climate-Related Disclosure Rule

Share Repurchases on Trial: Large-Sample Evidence on Market Outcomes, Executive Compensation, and Corporate Finances

Delaware Approves Permitting Exculpation of Officers from Personal Liability

Corporate Human Capital Disclosures: Early Evidence from the SEC’s Disclosure Mandate

Corporate Human Capital Disclosures: Early Evidence from the SEC’s Disclosure Mandate

Elizabeth Demers is Professor of Accounting at the University of Waterloo School of Accounting & Finance; Victor Xiaoqi Wang is Assistant Professor of Accountancy at California State University Long Beach; and Kean Wu is Associate Professor of Accounting at the Rochester Institute of Technology Saunders College of Business. This post is based on their recent paper.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here), both by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.

Human capital is a critically important source of corporate value creation in the modern economy, yet disclosures related to what executives commonly refer to as their “most important asset” have been extremely limited relative to those of other asset classes. This was supposed to change in November 2020 when the SEC’s amendment to Regulation S-K took effect. The new rules require that filers provide expanded discussion related to the firm’s human capital (HC) as part of Item 1 (i.e., the business description section) of their 10-K filing. The new rules are principles-based, however, so they allow for a tremendous amount of discretion without stipulating any specifics as to what companies should disclose. Early critics expressed concern that this approach would lead to too much heterogeneity in HC disclosures, that it was fraught with the potential for “greenwashing,” and that it would otherwise not yield the comparable quantitative data that investors need to properly assess corporate performance.

Our study provides the first comprehensive descriptive evidence required to assess the efficacy of the new regulation that has been subject to widescale criticisms in the investment community. We use textual analysis to extract the linguistic features and numerical intensity of HC disclosures for more than 3,000 unique public companies (i.e., all 10-K filers with corresponding financial data available), each reporting for the first time under the new regulation.

A number of interesting, stylized facts emerge from our analysis. First, consistent with anecdotal accounts, we provide systematic evidence that there is tremendous cross-sectional variation in the amount, numerical intensity, tone, readability, and similarity of HC disclosures both in absolute terms, and when benchmarked against the rest of the contents of the firm’s Item 1 disclosures. Although this may seem like good news from a regulatory perspective to the extent that it suggests that firms are not providing totally uninformative boilerplate disclosures, a less sanguine interpretation of the evidence is that the low level of similarity—even for firms within the same industry—will make it harder for investors to compare HC performance across firms.


Delaware Approves Permitting Exculpation of Officers from Personal Liability

Theodore N. Mirvis, David A. Katz, and Sabastian V. Niles are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

For over 45 years, Delaware law has permitted directors of Delaware corporations to be exculpated from personal monetary liability to the extent such protections are set forth in the certificate of incorporation, subject to certain exceptions. However, such protective statutory provisions did not reach officers. As contemplated in our April 2022 memorandum, Delaware has now adopted important amendments to Delaware’s General Corporation Law that would expand the right of a corporation to adopt an “exculpation” provision in its certificate of incorporation to cover not only directors (as has been allowed and widely adopted since 1986, following Smith v. Van Gorkom) but now also corporate officers

The officer liability exculpation provision is not self-effectuating; instead, the amendment to Delaware law allows companies to take action to adopt exculpation provisions that protect covered officers from personal liability on the same basis as directors—that is, for all fiduciary duty claims other than breaches of the duty of loyalty, intentional misconduct or knowing violations of law—with an additional exception that claims against officers will not be barred “in any action by or in the right of the corporation.” 

Under the newly amended provision of Delaware law, covered officers eligible for such exculpation from liability, if implemented by the corporation, will include the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer or chief accounting officer, the company’s most highly compensated executive officers as identified in SEC filings and certain other officers who have consented (or deemed to have consented) to be identified as an officer and to service of process. Companies and boards themselves will retain the right to bring appropriate actions against officers, and this additional exception will permit stockholder derivative claims against officers for breach of the duty of care to continue to be brought if demand requirements are met.


SEC Proposes to Narrow Three Substantive Exclusions in the Shareholder Proposal Rule

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum.

[This post revises and updates my earlier post on this topic primarily to reflect the contents of the proposing release.]

At an open meeting last week, the SEC voted, three to two, to propose new amendments to Rule 14a-8, the shareholder proposal rule. Under Rule 14a-8, a shareholder proposal must be included in a company’s proxy materials “unless the proposal fails to satisfy any of several specified substantive requirements or the proposal or shareholder-proponent does not satisfy certain eligibility or procedural requirements.” The SEC last amended Rule 14a-8 in 2020 to, among other things, raise the eligibility criteria and resubmission thresholds. The SEC is now proposing to amend three of the substantive exclusions on which companies rely to omit shareholder proposals from their proxy materials: Rule 14a-8(i)(10), the “substantial implementation” exclusion, would be amended to specify that a proposal may be excluded as substantially implemented if “the company has already implemented the essential elements of the proposal.” Rule 14a-8(i)(11), the “substantial duplication” exclusion, would be amended to provide that a shareholder proposal substantially duplicates another proposal previously submitted by another proponent for a vote at the same meeting if it “addresses the same subject matter and seeks the same objective by the same means.” Rule 14a-8(i)(12), the resubmission exclusion, would be amended to provide that a shareholder proposal would constitute a “resubmission”—and therefore could be excluded if, among other things, the proposal did not reach specified minimum vote thresholds—if it “substantially duplicates” a prior proposal by “address[ing] the same subject matter and seek[ing] the same objective by the same means.” The SEC indicates that almost half of the no-action requests the staff received under Rule 14a-8 in 2021 were based on these three exclusions. In his statement, SEC Chair Gary Gensler indicated that the proposed amendments would “improve the shareholder proposal process” by providing “greater certainty as to the circumstances in which companies are able to exclude shareholder proposals from their proxy statements.” In the proposing release, the SEC contends that the amendments “are intended to improve the shareholder proposal process based on modern developments and the staff’s observations” and “would facilitate shareholder suffrage and communication between shareholders and the companies they own, as well as among a company’s shareholders, on important issues.” Notably, however, the two dissenting commissioners seemed to view the proposed changes—even though they stop well short of revamping the 2020 eligibility criteria and resubmission thresholds—as an effort to undo or circumvent the balance achieved by the 2020 amendments without actually modifying those aspects of the rules. For example, new Commissioner Mark Uyeda said that the proposed amendments could “effectively nullify the 2020 amendments to the resubmission exclusion and render this basis almost meaningless.”


Share Repurchases on Trial: Large-Sample Evidence on Market Outcomes, Executive Compensation, and Corporate Finances

Nicholas Guest is an Assistant Professor of Accounting at Cornell University Johnson Graduate School of Management; S.P. Kothari is the Gordon Y Billard Professor of Accounting and Finance at MIT Sloan School of Management; and Parth Venkat is an Assistant Professor of Finance at the University of Alabama Culverhouse College of Business. This post is based on their recent paper.

Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows (discussed on the Forum here) by Jesse Fried and Charles C. Y. Wang; and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay (discussed on the Forum here) by Jesse Fried.

Many in politics and the media question the economic efficacy and ethical provenance of share repurchases, a ubiquitous corporate financial activity. Most recently, the federal government’s proposed 2022 budget disclosed their aims to curb repurchase activity with a one percent tax on all repurchases and to bar executives from selling shares for three years after a repurchase (see recent coverage by the New York Times). Our key question is whether evidence supports the critiques used to justify these and other anti-repurchase initiatives.

Our primary contribution is large-sample evidence on the trends and effects of share repurchases by US corporations. Specifically, we document trends in repurchases, and compare trading volume, share price performance, CEO pay, and corporate financial activities (e.g., investment and profitability) of firms in three groups: those that intensively repurchase shares, those that do so sparingly, and those that do not at all. We also provide a brief outline of the common economic rationale for and criticisms of share repurchases. However, our goal is not to rehash the numerous conceptual rationales in defense of share repurchases, nor argue that there are no cases when repurchases could be misused. Instead, we provide large-sample evidence on whether repurchases are systematically abusive, as suggested by some proponents of significant regulation.

There are several reasons why corporations might prefer using share repurchases instead of or in addition to dividends, including (i) maintaining flexibility in determining the amount of cash returned to shareholders, (ii) an ability to award repurchased shares to employees as equity compensation, (iii) a modest tax advantage to shareholders (that became less pronounced after the 2003 dividend tax cut), and (iv) the ability to send a credible signal of the firm’s (good) prospects.


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