Monthly Archives: February 2020

8-K Trading Gap Act

Michael Kaplan, Richard D. Truesdell and Robert Cohen are partners at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum. Related research from the Program on Corporate Governance includes The 8-K Trading Gap by Alma Cohen, Robert J. Jackson, Jr., and Joshua Mitts, the study described by the post as providing the empirical basis for the proposed Bill.

Last week, the House overwhelmingly passed legislation aimed at closing what lawmakers have called a “loophole” for insider trading—corporate insiders trading between the occurrence of a corporate event and its disclosure through a Form 8-K filing (the “8-K Gap”). The 8-K Trading Gap Act (“the Bill”) passed with broad bipartisan support. If passed by the Senate and enacted into law, it would require public companies to adopt policies and procedures reasonably designed to prevent corporate insiders from trading before Form 8-K disclosures.  Although most or all public companies already have internal policies to prevent insider trading, the Bill would require policies as a matter of law, would create a new risk of SEC enforcement action if a company’s policies are deemed unreasonable, and would require that policies extend to some announcements even if they do not involve material information.

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Weekly Roundup: January 31-February 6, 2020


More from:

This roundup contains a collection of the posts published on the Forum during the week of January 31-February 6, 2020.

Navigating the ESG Landscape


2019 Year-End Securities Enforcement Update






SEC’s Office of Compliance Inspection: Examination Priorities for 2020




Supreme Court Is Asked to Weaken the SEC’s Ability to “Make Things Right”: Amici Curiae Brief



White-Collar and Regulatory Enforcement: What Mattered in 2019 and What to Expect in 2020



Proxy Access: A Five-Year Review


Confidential Treatment Applications and SEC Disclosure Guidance






The Economics of Regulating Proxy Advisors

The Economics of Regulating Proxy Advisors

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. This post is based on his recent comment letter to the SEC in response to request for comments on the proposed rule regarding proxy advisors (discussed in posts here and here).

Below is text from the comment letter that I submitted to the SEC earlier this week with respect to the proposed rule regarding proxy advisors. My comments focus on the economic analysis described in the Commission’s Release (“the Economic Analysis”).

* * * *

As explained below, the Economic Analysis cannot provide a basis for SEC rulemaking in this area. The Economic Analysis fails in its analysis of both the benefits and the costs of the proposed rule and overlooks significant effects and issues. Below I do not attempt to identify and discuss all the shortcomings of the economic analysis described in the Release, but only to note several significant problems that by themselves indicate the necessity of redoing the economic analysis before proceeding to decision-making. However, I will be happy to assist the Commission or the Staff with identifying all the shortcomings that need to be addressed and carrying out the necessary economic analysis of the subject.

1. The Economic Analysis takes the view that the proposed rule would have an unambiguously positive effect on the accuracy and value to clients of proxy advisor reports. However, in this respect, the Economic Analysis fails to take into account that the overall effect of the proposed amendments would be to make it costlier to proxy advisors to express views and conclusions that would displease an issuer than to express views and conclusions that would please an issuer. (For example, a displeased issuer would be more likely to submit elaborate objections that the proxy advisor would have to review within a short time frame than a pleased issuer.) This effect would incentivize proxy advisors to draft reports that would be more favorable to issuers than otherwise (or than they have been doing thus far).

2. The Economic Analysis takes the view that requiring proxy advisors to have a very detailed discussion of potential conflicts with the issuer reviewed by the advisor would be unambiguously beneficial. In reaching this conclusion, the Economic Analysis fails to engage with the following:

(i) complying with the requirement for such disclosure would also involve substantial costs, which would be passed on to clients;

(ii) the requirement would provide an issuer that is dissatisfied with the proxy advisor’s report with more opportunities to challenge text in proxy advisor reports as incomplete or misleading, which would provide further incentives for proxy advisors to tilt their conclusions in favor of issuers; and

(iii) the Commission does not require, and has not considered requiring, that investment managers provide to their beneficial investors detailed disclosures about their relationship with each portfolio company in which they cast votes, even though the reasoning of the Economic Analysis with respect to conflict disclosures by proxy advisors would also apply to such disclosures by investment managers.

3. The Economic Analysis concludes that the proposed amendments would benefit institutional investors by improving the accuracy and transparency of proxy advisor reports. If this were the case, it would be expected that, because institutional investors are informed and sophisticated players, they would have already pressed proxy advisors to follow practices of the kind that the proposed amendments would require—or at least would have expressed widespread support for such regulations in the SEC roundtable and other forums and opportunities. The lack of such widespread support is inconsistent with, or at least in tension with, the view that the proposed amendments would benefit the clients of institutional investors, and the Economic Analysis does not engage with this evidence.

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Glass Lewis Comment Letter to the SEC About Proposed Proxy Rules for Proxy Voting Advice

Gordon Seymour is Special Counsel for Public Policy and Nichol Garzon-Mitchell is Senior Vice President and General Counsel at Glass, Lewis & Co. This post is based on a Glass Lewis comment letter to the SEC in response to request for comments on the proposed rule regarding proxy advisors (discussed in posts here and here).

Thank you for the opportunity to comment on the “Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice,” recently proposed by the Securities and Exchange Commission. [1] Glass Lewis shares the Commission’s goal of making sure that the proxy process functions properly and enables shareholders to exercise their right to vote at annual and special meetings. To that end, Glass Lewis has engaged with the Commission on numerous occasions during its continuing efforts to explore how to improve the proxy process, a critical component of the corporate governance system.

Glass Lewis also fully supports and embraces the stated objectives of the Commission’s proposal with respect to proxy advice—promoting the accuracy, conflict management and disclosure, and transparency of that advice. This includes appropriate engagement with the companies that are the subject of proxy advice. In fact, we have committed to follow the internationally-endorsed Best Practices Principles for Shareholder Voting Research Providers, which address these critical issues, and annually report on our compliance with those principles.

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ISS Comment Letter on Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice

Subodh Mishra is Managing Director at Institutional Shareholder Services, Inc. This post is based on a recent comment letter from ISS President & CEO Gary Retelny to the SEC in response to request for comments on the proposed rule regarding proxy advisors (discussed in posts here and here).

Institutional Shareholder Services Inc. (ISS) submits these comments in response to the above-referenced proposal to regulate proxy advice as a proxy solicitation under the Securities Exchange Act of 1934 (Exchange Act). [1]

Over the past several years, proxy advisers have become surrogates in the debate over how much say shareholders should have in the companies they own. On one side of this debate are shareholders and their representatives, who see proxy voting as an integral part of their fiduciary responsibilities and a duty of good corporate citizenship and who believe proxy advisers play a critical role in aggregating and synthesizing the vast array of data found in proxy statements and providing independent research, analysis and advice that help shareholders make well-informed voting decisions. On the other side are certain corporate representatives who appear to resent shareholders’ ability to disagree with management and who have launched a volley of attacks against proxy advisers based mostly on anecdote, faulty reasoning and the occasional fabricated news. In issuing the current rule proposal, the SEC has put its finger firmly on the issuers’ side of the scale, a departure from its stated mission. Distilled to its essence, the proposal would give the managers of U.S. public companies an unprecedented and unconstitutional editorial role in the production of the research and vote recommendations that institutional investors engage proxy advisers to provide.

The proposal has three core components.

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The Economics of Shareholder Proposal Rules

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. This post is based on his recent comment letter to the SEC in response to the request for comments on the proposed rule regarding the submission and resubmission of shareholder proposals (discussed in posts here and here).

Below is text from the comment letter that I submitted to the SEC earlier this week with respect to the proposed rule. The comments focus on the economic analysis described in the Commission’s Release (“the Economic Analysis”).

* * * *

As I explain below, the Economic Analysis does not provide an acceptable basis for SEC rulemaking in this area. The Economic Analysis fails to adequately analyze the costs and benefits of the proposed rule, as well as its effects on efficiency, competition and capital formation; overlooks significant effects and issues; and does not use evidence that is available or could be obtained.

Below I do not attempt to identify and discuss all the significant shortcomings of the economic analysis described in the Release. I only note several significant problems that by themselves indicate the necessity of redoing the economic analysis before proceeding to decision-making. However, I will be happy to assist the Commission or the Staff with identifying all the shortcomings that need to be addressed and carrying out the necessary economic analysis of the subject.

The Basic Economics of Shareholder Proposals

1. The Economic Analysis fails to give adequate weight to the Commission’s long-standing interest in facilitating private ordering and the key role that shareholder proposals play in such private ordering. Shareholder proposals provide a key instrument for shareholder-driven private ordering intended to bring about value-enhancing governance changes that are disfavored by directors and executives.

In this connection, because the Economic Analysis does not analyze the subjects of proposals could be expected to be excluded under the proposed rule, the Economic Analysis does not engage with the data indicating that shareholder proposals by retail investors have played a key role in the adoption by numerous companies of changes widely viewed as consistent with best governance practices.

To illustrate, annual elections are supported by the ISG Corporate Governance Principles and the proxy voting guidelines of the vast majority of institutional investors. Had the Economic Analysis examined the data on the subject, it would have found that retail investors have been responsible for a majority of the precatory proposals that led a large number of companies to adopt annual elections.

2. The Economic Analysis fails to give adequate weight to the evidence that significant institutional investors tend to avoid the submission of shareholder proposals though they regularly vote for certain types of shareholder proposals. Scott Hirst and I document in a recent article that the Big Three index fund managers have generally avoided the submission of any shareholder proposal—not even proposals advocating the changes favored by their own governance. [1] In other research, we have found that managers of actively managed mutual funds also tend to largely avoid the submission of shareholder proposals. This evidence highlights the costs that would result from discouraging the submission of proposals by those retail investors and organizations with relatively small stakes that play an important role in private ordering.

Relatedly, the Economic Analysis fails to give adequate weight to the benefits that shareholders that do not submit proposals themselves derive from the proposal submission. The Economic Analysis notes that the submission of proposals imposes costs on non-submitting shareholders by requiring them to bear the costs of assessing the proposals. However, as the corporate governance system currently operates, many institutional investors currently benefit significantly (and some even rely on) the submission of proposals that they regularly vote for to bring about changes that are favored by the institutional investors’ own governance principles.

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Advance Notice Bylaw and Activists Board Nominees

Steven M. Haas is partner at Hunton Andrews Kurth LLP. This post is based on a Hunton Andrews Kurth memorandum by Mr. Haas, 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 Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

The Delaware Supreme Court recently held that a stockholder activist failed to comply with an advance notice bylaw. The Supreme Court ruled that the bylaw was clear and unambiguous and the activist’s failure to comply rendered its nominees ineligible. In doing so, the Supreme Court reversed the Court of Chancery’s determination that the board of directors had acted outside the scope of the advance notice bylaw by demanding supplemental information from the activist stockholder.

Background

BlackRock Credit Allocation Income Trust v. Saba Capital Master Fund, Ltd., involved two closed-end investment funds structured as Delaware statutory trusts. Under the funds’ bylaws, a stockholder was required to provide advance notice of its intent to nominate directors at the funds’ annual meetings.

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Confidential Treatment Applications and SEC Disclosure Guidance

Brian Breheny is partner, Hagen Ganem is counsel and Caroline Kim is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Breheny, Mr. Ganem, Ms. Kim, Andrew Brady, Josh LaGrange and Ariana Taylor.

In December 2019, the Division of Corporation Finance (Staff) of the U.S. Securities and Exchange Commission issued new “CF Disclosure Guidance: Topic No. 7” (Guidance) regarding confidential treatment requests pursuant to Securities Act Rule 406 and Exchange Act Rule 24b-2.

The Guidance addresses how and what to include when submitting a confidential treatment request objecting to public release of information otherwise required to be filed under the Securities Act and the Exchange Act. The guidance replaces and supersedes the guidance provided in Staff Legal Bulletins 1 and 1A.

As discussed in our May 17, 2019, client alert, “A Guide to Redacting Commercially Sensitive Information From Exhibits Filed With the SEC,” the exhibit filing requirements in Item 601(b) of Regulation S-K were amended in April 2019 to permit the redaction of immaterial and commercially sensitive information from filed agreements without submitting a confidential treatment request. While most companies now rely on those provisions, the process described in the Guidance still is available to companies as an alternative (albeit generally less desirable) approach to protecting confidential information from being disclosed to the public. In addition, certain filings, such as Schedule 13D or filings whose exhibit requirements are set out in Item 1016 of Regulation M-A, still are required to submit confidential treatment requests according to the process described in the Guidance, given it remains the only available method to protect confidential information from public disclosure in those instances.

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Proxy Access: A Five-Year Review

Holly J. Gregory is partner, Rebecca Grapsas is counsel, and Claire H. Holland is special counsel at Sidley Austin LLP. This post is based on a Sidley memorandum by Ms. Gregory, Ms. Grapsas, Ms. Holland, John P. KelshThomas J. Kim, and Kai H.E. Liekefett. Related research from the Program on Corporate Governance includes The Case for Shareholder Access to the Ballot by Lucian Bebchuk (discussed on the Forum here); The Myth of the Shareholder Franchise by Lucian Bebchuk (discussed on the Forum here); and Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge by Bo Becker, Daniel Bergstresser, and Guhan Subramanian (discussed on the Forum here).

Pressure from large institutional investors, including public and private pension funds, and other shareholders has led to the widespread adoption of proxy access by large U.S. public companies in the past five years. Proxy access is now mainstream at S&P 500 companies (76%) and has been adopted by just over half of the companies in the Russell 1000. Proxy access gives eligible shareholders the power to nominate a number of director candidates for inclusion in the company’s proxy materials.

As a follow-up to our reports titled The Latest on Proxy Access from January 2019 and Proxy Access—Now a Mainstream Governance Practice from February 2018, this post provides a five-year review of proxy access in the U.S. as of the end of 2019. Topics covered include:

  • The rapid rise of proxy access at U.S. companies since 2015.
  • Management and shareholder proposals relating to proxy access.
  • Institutional investor support for proxy access.
  • Proxy advisory firm policies on proxy access.
  • Typical parameters of proxy access provisions.
  • The fact that proxy access has been used in the U.S. only once.
  • Practical guidance for companies considering whether and when to adopt proxy access.

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Governance of Corporate Insider Equity Trades

Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on a recent paper by Mr. Tayan; David F. Larcker, James Irvin Miller Professor of Accounting at Stanford Graduate School of Business; John D. Kepler, Assistant Professor of Accounting at Stanford Graduate School of Business; and Daniel Taylor, Associate Professor of Accounting at the Wharton School of the University of Pennsylvania. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

We recently published a paper, Governance of Corporate Insider Equity Trades, that examines the potential shortcomings of existing governance practices around the approval of executive equity sales. Corporate executives receive a considerable portion of their compensation in the form of equity (e.g., stock, options, or restricted stock) and, from time to time, sell a portion of their equity holdings in the open market. Executives nearly always have access to nonpublic information about the company, and routinely have an information advantage over public shareholders. This raises the possibility that some executives might exploit this advantage for personal gain and trade on nonpublic information.

Federal securities laws prohibit executives from trading on material nonpublic information about their company. Officers and directors have a fiduciary duty to shareholders that compels them to either disclose any material, non-public information to shareholders or abstain from trading—a rule known informally as ‘disclose or abstain.’ Under Rule 10b5-1, insiders can enter into a non-binding contract that instructs an independent third-party broker to execute trades on their behalf (10b5-1 plan). If the plan is adopted at a time when the insider is not in possession of material nonpublic information, the plan will provide an “affirmative defense” against alleged violations of insider trading laws. Regardless of whether executives use a 10b5-1 plan, the SEC requires that they publicly disclose their trades in the company’s shares within two-business days on Form 4.

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