Monthly Archives: November 2019

Statement of Commissioner Allison Herren Lee on Shareholder Rights

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement, available here. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

There is a common theme that unites the two proposals before us today[Nov. 5, 2019]: they both would operate to suppress the exercise of shareholder rights.

The proposed changes to our current proxy regime would make it more costly and more difficult for shareholders to cast their votes or even to get their issues onto corporate ballots. There is a stark divide between issuers and shareholders on the policies reflected here. [1] The bottom line is that these policy choices, if adopted, would shift power away from shareholders and toward management.

There is nothing inherently wrong in making such a choice, particularly if data suggests the need to correct some imbalance. But what does the data show about proxy voting? That the vote recommended by management carries the day some 90 percent of the time. [2] Management’s views nearly always prevail. That is the context in which we consider these two proposals that would tilt the scales even further against shareholders.


Statement of Chairman Jay Clayton on Proposals to Enhance the Accuracy, Transparency and Effectiveness of Our Proxy Voting System

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent statement at an open meeting of the SEC, available here. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good morning. This is an open meeting of the U.S. Securities and Exchange Commission, under the Government in the Sunshine Act.

Today [Nov. 5, 2019] we have two items on the agenda. These items are part of the Commission’s ongoing work to enhance the accuracy, transparency and effectiveness of our proxy voting system. They reflect the considerable experience of our staff. In 2018, almost 5,700 proxy materials were filed with the Commission, and the staff in the Division of Corporation Finance received more than 250 no-action requests relating to shareholder proposals.

Today’s proposals are both rooted in key principles of our securities law. First, materiality. The proposals are designed to ensure investors receive the material information that would be expected to affect their investment decisions (including voting decisions). [1] Second, facilitating constructive, information-rich engagement among shareholders and issuers in a manner that benefits all shareholders and our public capital markets more generally. [2]


Statement of Commissioner Elad Roisman on Modernizing SEC Rules Governing Proxy Voting Advice, Procedural Requirements, and Resubmission Thresholds under Exchange Act Rule 14a-8

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Roisman’s recent statements at an open meeting of the SEC, available here and here. The views expressed in the post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I. Introduction—An Important Milestone

Thank you, Chairman Clayton.

I have said before that proxy voting is fundamental to our capital markets. [1] Improving proxy voting is a subject that I am passionate about, and one I have cared about deeply for the better part of my career.

Today marks an important day for having, and continuing, a real and valuable debate about topics involving investors and companies. Much has been written and said about the shareholder-company dynamic for over a century in this country, and these debates likely will continue for at least another century as the market continues to evolve.

But it is always important to keep these conversations productive. Allowing long-standing debates to persist becomes polarizing—it gets easier for advocates on both sides to view themselves as good and opponents as evil. To me, the truth is that generalizations and portraying things in a binary manner are great for movies, but hardly ever reflect reality or serious thinking.


Statement of Commissioner Robert Jackson on Proposals to Restrict Shareholder Voting

Robert J. Jackson, Jr. is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on his recent statement at an open meeting of the SEC, available here. The views expressed in the post are those of Commissioner Jackson and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Thank you, Mr. Chairman, and thanks to Commissioner Roisman, Division Director Bill Hinman, and especially the tremendous Staff in the Division of Corporation Finance for their hard work in advance of today’s meeting. And congratulations to all of my colleagues who watched the Washington Nationals earn their first World Series title last week. [1]

Today [Nov. 5, 2019] the Commission proposes rule changes that would limit public-company investors’ ability to hold corporate insiders accountable. We haven’t examined our rules in this area for years, so updating them makes sense—and these issues have been thoughtfully debated for decades. [2] But rather than engage carefully with the evidence produced by those debates, today’s proposal simply shields CEOs from accountability to investors. Whatever problems plague corporate America today, too much accountability is not one of them, so I respectfully dissent.


The Basis for ISS’ Lawsuit Against the SEC

Steven Friedman is General Counsel at Institutional Shareholder Services, Inc.

On October 31, 2019, Institutional Shareholder Services (ISS) filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) challenging interpretation and guidance put forth by the Commission in August that applies the proxy solicitation rules to the provision of proxy advice.  The lawsuit challenges the process by which the guidance was issued and, as important, the substance and legality of the SEC’s view on what constitutes a solicitation under The Securities Exchange Act of 1934.  The SEC has taken a position that we believe is inconsistent with both Congress’s intent in adopting the Exchange Act and the plain meaning of the law.

If allowed to stand, the August interpretation and guidance would effectively treat the advice proxy advisers provide to their clients in the same way that the SEC regulates proxy solicitations (meaning the communications, most typically made by the boards and management of public companies, advocating that shareholders vote to support the position favored by the person doing the solicitation).  In contrast, proxy advice is a specialized form of investment advice rendered at the direction, and in the best interest, of our institutional investor clients. As such, proxy advice is the antithesis of a “solicitation” under the securities laws. READ MORE »

Remarks to the SEC Fixed Income Market Structure Advisory Committee

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement, available here. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Michael [Heaney]. Good morning everyone. Thank you all for being here and for traveling to our offices in New York. [1] Today’s [Nov. 4, 2019] agenda is full and important. You have assembled expert panels on (1) structured disclosures by municipal issuers, (2) rating agency compensation models, (3) index construction, (4) government securities trading platforms, and (5) the LIBOR transition. We also have updates from our Technology and Electronic Trading Subcommittee and the Corporate Bond Transparency Subcommittee.

I could not be more pleased with the work of the Committee over the last two years. You have brought a diversity of expertise and perspective that has enhanced our understanding of the fixed income markets and informed policy decisions. Since the FIMSAC’s last meeting, the Commission has appointed Giedre Ball and Lee Olesky to fill the vacancies left by Carole Brown and Amar Kuchinad. I would like to extend a warm welcome to Geidre Ball, the Debt Program Manager at the Metropolitan Washington Airports Authority, and Lee Olesky, the CEO of Tradeweb. Geidre and Lee, thank you for participating on this Committee and sharing your expertise.


Class Action Nuisance Suits: Evidence from Frequent Filer Shareholder Plaintiffs

Sean J. Griffith is T.J. Maloney Chair and Professor of Law at Fordham Law School. This post is based on his recent paper, forthcoming in the Cambridge International Handbook of Class Actions.

2018 was another big year for shareholder suits challenging mergers and acquisitions. According to a recent study by Cornerstone, 82% of M&A deals valued over $100 million attracted litigation in 2018, only slightly down from the 90% of M&A deals that were challenged in the years 2009 through 2015, prior to the Delaware Court of Chancery’s 2016 decision in In re Trulia. Indeed, the Cornerstone study reveals that Trulia did not put an end to M&A lawsuits, but merely changed where they are brought. Instead of being litigated predominantly in Delaware under state corporate law, 91% of merger lawsuits in 2018 were brought in federal district courts under federal securities law.

Commenting on these findings in Law 360 one prominent plaintiffs’ lawyer compared the shift of merger suits from state to federal court to rats following a trail of scraps in an apartment building, concluding that “those same rats just moved to federal court.” But how has moving to federal court changed the conduct of merger litigation? What differences are there in claims and outcomes now that these cases are predominantly brought in federal rather than state court?


Index Funds and the Future of Corporate Governance: Replying to Critics

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, at Harvard Law School. Scott Hirst is Associate Professor at Boston University School of Law and Director of Institutional Investor Research at the Harvard Law School Program on Corporate Governance.

This post is based on their study (discussed on the Forum here). Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

We recently placed on SSRN a revised and expanded version of our forthcoming article, Index Funds and the Future of Corporate Governance: Theory, Evidence and Policy, which will be published in the December issue of the Columbia Law Review. The article puts forward a comprehensive theoretical, empirical and policy analysis of index fund stewardship.

Our article has been in circulation for the last year, and we have been fortunate to receive reactions and responses to our work from many academics, both in their writings and in various fora in which earlier versions of this article were presented, as well as from practitioners. Our revision attempts to engage in detail with the arguments of a wide range of commentators taking a different view on index fund stewardship.

Among the academic works taking such a different view with which we engage are studies by Ian Appel, Todd Gormley & Donald Keim; John Coates; Asaf Eckstein; Einer Elhauge; Jill Fisch, Assaf Hamdani & Steven Davidoff Solomon; Ron Gilson & Jeff Gordon; Caleb Griffin; Sean Griffith; Marcel Kahan & Ed Rock; Patrick Jahnke; Jonathan Lewellen & Katharina Lewellen; Dorothy Lund; Alexander Platt; and Eric Posner, Fiona Scott Morton & Glen Weyl..

Among the practitioners with whose reactions or arguments we engage are officers of the “Big Three,” BlackRock, State Street Governance Advisors, and Vanguard,

We continue to work on these issues, and comments and reactions from readers would be most welcome.

The revised version of our article is available here.

New Guidance on Excluding Shareholder Proposals

Thomas Kim is partner, Andrea Reed is counsel, and Claire Holland is special counsel at Sidley Austin LLP. This post is based on a Sidley memorandum by Mr. Kim, Ms. Reed, Ms. Holland, Holly Gregory, John Kelsh, and Rebecca Grapsas.

On October 16, 2019, the staff of the SEC’s Division of Corporation Finance (the Division Staff) issued Staff Legal Bulletin No. 14K (CF) (SLB No. 14K), which provides additional guidance on the excludability of shareholder proposals under Exchange Act Rule 14a-8. SLB No. 14K clarifies and expands upon previous guidance provided by the Division Staff, including most recently in Staff Legal Bulletin No. 14J (CF) (SLB No. 14J) and Staff Legal Bulletin No. 14I (CF) (SLB No. 14I). [1] It provides useful insight into how the Division Staff will approach future no-action requests seeking exclusion of shareholder proposals on the basis of Rules 14a-8(i)(7) (the “ordinary business” exception) and 14a-8(b) (deficient proof of ownership).

Heightened Expectations for No-Action Requests Relying on the “Ordinary Business” Exception

Discussion of a Policy Issue’s Significance Should Be Company-Specific

A company may exclude a proposal under Rule 14a-8(i)(7) if it “deals with a matter relating to the company’s ordinary business operations.” However, the Division Staff will not permit a company to exclude a proposal if it transcends the company’s day-to-day business matters by raising a policy issue so significant that it would be appropriate for a shareholder vote.


Conflicts and Biases in the Boardroom

Adrianne Trainor is the Director of Content and Research at the Center for Board Excellence and Byron Loflin is Founder and CEO of the Center for Board Excellence. This post is based on their article published in Corporate Board Member.

Corporate governance provides foundational integrity that supports an effectively managed organization. Excellent governance requires skill, insight and informed, objective decision-making. Governance is like a plant’s root system. The visible health and strength of the plant (company) depends in large part on the health of the root (governance) beneath the surface. Like the root, governance is the (mostly) unseen vital anchor and stabilizer. Think of a healthy oak tree as a metaphor for strong governance. The tree is the company and the taproot is its governance vis-à-vis the board of directors. Board culture, processes, structure and policies that support strong governance and accountability are the fibrous roots growing from the main root. The board grows a strong governance root structure by being strategic and focusing on long-term performance. READ MORE »

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