Yearly Archives: 2021

BlackRock’s Move to Expand Proxy Voting Choice Creates Unknowns

Posted by Douglas Chia, Soundboard Governance, on
Saturday, November 20, 2021
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Douglas Chia is Founder and President of Soundboard Governance LLC and a Fellow at the Rutgers Center for Corporate Law and Governance. This post is based on his Soundboard Governance memorandum. 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); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk 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).

BlackRock, the world’s largest asset manager, announced on October 7, 2021 that it will start giving certain of its institutional index equity clients the ability to instruct BlackRock how those clients would like their votes to be cast at shareholder meetings of companies in BlackRock’s index funds. This move is savvy. BlackRock can look like a good corporate governance actor furthering shareholder democracy by placing voting power back into the hands of asset owners and deflect criticism that it too often defers to management and elects not to use its massive voting power in more activist ways. The announcement has received wide praise, but the move creates a few unknowns.

Transparency

BlackRock will give its clients several choices on how to instruct their shares to be voted, including continuing to give BlackRock full discretion. However, close observers of proxy voting activity will not know which of BlackRock clients choose to take back discretion on their votes or how those clients cast those votes, even when BlackRock submits its Form N-PX filings. None of this information will become public unless BlackRock or its clients voluntarily disclose it.

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SEC Dramatically Changes the Rules for Proxy Contests

Posted by Kai Liekefett, Derek Zaba, and Beth Berg, Sidley Austin LLP, on
Friday, November 19, 2021
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Kai Liekefett, Derek Zaba, and Beth Berg are partners at Sidley Austin LLP. This post is based on their Sidley memorandum. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

On November 17, 2021, the U.S. Securities and Exchange Commission (SEC) adopted new Rule 14a-19 and amendments to existing rules under the Securities Exchange Act of 1934 to require the use of “universal” proxy cards in all nonexempt director election contests at publicly traded companies in the U.S. The new “Universal Proxy Rules” contain only slight modifications from rules the SEC first proposed in October 2016, for which the SEC reopened the public comment period during 2021. The rules will take effect for shareholder meetings after August 31, 2022. We expect a significant increase in proxy contest threats once the Universal Proxy Rules go in effect.

Members of Sidley’s Shareholder Activism & Corporate Defense Practice sent a formal comment letter to the SEC regarding the proposed rules — the only letter from a U.S. law firm suggesting material amendments that would protect against the potential for misuse of a mandatory universal proxy system. As we argued previously, the Universal Proxy Rules create the equivalent of “proxy access on steroids.” While comparable to the vacated Rule 14a-11, which allowed shareholders holding at least 3% of a company’s outstanding shares for three years to put dissident directors on the company’s proxy statement, the Universal Proxy Rules confer substantially more significant rights to shareholders without any minimum ownership requirements (i.e., owning only one share for one minute will be sufficient). Although this was a concern voiced by several Commissioners, the SEC proceeded with the adoption of the Universal Proxy Rules as originally proposed. The new rules will reshape the process by which hostile bidders, activist hedge funds, social and environmental activists, and other dissident shareholders may utilize director elections to influence control and policy at public companies.

As the rules will dramatically change the methods by which proxy contests at public companies have been conducted for decades, this article summarizes the principal mechanics of the Universal Proxy Rules and the implications of the rules for public companies.

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Statement by Commissioner Roisman on Proposed Amendments Related to Proxy Voting Advice

Posted by Elad L. Roisman, U.S. Securities and Exchange Commission, on
Friday, November 19, 2021
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Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on his recent public statement. The views expressed in this post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Over the past several years, much has been said about what the rise in fund ownership throughout our equity markets might mean for our economy. [1] But one outcome of increasing fund growth is clear: as funds come to own an ever larger percentage of U.S. corporate equities, they can influence the outcome of a variety of matters that companies submit to a shareholder vote. [2] As recently as a month ago, [3] the Commission acknowledged this fact and pursued policies designed to ensure that those who manage funds approach voting in a manner that serves the best interest of their clients. [4]

I. The Importance of Proxy Voting Advice to Investors

One cannot consider the implications of fund voting without also considering the role of those unique businesses that have become integral to the voting processes of so many asset managers: proxy voting advice businesses, also known as proxy advisory firms or proxy advisors. [5] Since fund portfolios often hold securities of many public companies, asset managers often face the prospect of voting on hundreds—if not thousands—of proposals relating to hundreds of fund portfolio companies each year, with the significant portion of those voting decisions concentrated in a period of a few months. [6] Proxy advisory firms offer services to assist them. Most substantively, these services include providing research and analysis regarding the matters subject to a vote; developing voting guidelines that asset managers can adopt; and making recommendations about how funds should vote on specific matters. [7] Proxy advisors also commonly provide electronic vote management systems through which asset managers can access not only their voting advice, but also proxy ballots pre-populated with the proxy advisor’s voting recommendations, ready for submission to be counted. [8]

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Weekly Roundup: November 12-18, 2021

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, November 19, 2021

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This roundup contains a collection of the posts published on the Forum during the week of November 12-18, 2021.

M&A/PE Update

Posted by Gail Weinstein, Philip Richter, and Steven J. Steinman, Fried, Frank, Harris, Shriver & Jacobson LLP, on Friday, November 12, 2021
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Optimizing The World’s Leading Corporate Law: A 20-Year Retrospective and Look Ahead

Posted by Lawrence A. Hamermesh (University of Pennsylvania), Jack B. Jacobs (Young Conaway Stargatt & Taylor, LLP), and Leo E. Strine, Jr. (University of Pennsylvania), on Friday, November 12, 2021
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Roundup of Director Overboarding Policies

Posted by Holly Gregory, Rebecca Grapsas, and Claire Holland, Sidley Austin LLP, on Saturday, November 13, 2021
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2021 U.S. Board Index

Posted by Julie Hembrock Daum, Kathleen Tamayo, and Ann Yerger, Spencer Stuart, on Saturday, November 13, 2021
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Renren Settlement Highlights Increased Risk of U.S. Derivative Litigation Concerning Foreign Private Issuers

Posted by Stephen Blake, Adam Goldberg, and Bo Bryan Jin, Simpson Thacher & Bartlett LLP, on Sunday, November 14, 2021
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FSOC Issues Report Declaring Climate Change as Emerging Threat to U.S. Financial Stability

Posted by Jason Halper, Sara Bussiere and Timbre Shriver, Cadwalader, Wickersham & Taft LLP, on Sunday, November 14, 2021
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Investment Management Regulatory Update

Posted by Gregory S. Rowland, Sarah Kim, and Leon Salkin, Davis Polk & Wardwell LLP, on Monday, November 15, 2021
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Does Regulatory Cooperation Help Integrate Equity Markets?

Posted by Roger Silvers (University of Utah), on Monday, November 15, 2021
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Of Owners and Ownership

Posted by Paul Singer, Elliott Investment Management, on Monday, November 15, 2021
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DOJ Announces Revisions Strengthening Corporate Criminal Enforcement Policies

Posted by Jonathan Kolodner, Joon Kim, and Elizabeth (Lisa) Vicens, Cleary Gottlieb Steen & Hamilton LLP, on Tuesday, November 16, 2021
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Hearing on Board Gender Diversity Statute

Posted by Cydney Posner, Cooley LLP, on Tuesday, November 16, 2021
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Elizabeth Holmes and The Mythology of Silicon Valley

Posted by Boris Feldman and Sarah Solum, Freshfields Bruckhaus Deringer LLP, on Tuesday, November 16, 2021
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Stockholder Nominees Barred For Noncompliance With “Clear Day” Advance Notice Bylaw

Posted by Andre G. Bouchard, Krishna Veeraraghavan, and Steven J. Williams, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on Wednesday, November 17, 2021
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The Rescue of Fannie Mae and Freddie Mac–Module F: Federal Reserve’s Large-Scale Asset Purchase (LSAP)

Posted by Rosalind Z. Wiggins (Yale), on Wednesday, November 17, 2021
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Remarks by Commissioner Crenshaw Remarks at the PepsiCo-PwC CPE Conference

Posted by Caroline A. Crenshaw, U.S. Securities and Exchange Commission, on Wednesday, November 17, 2021
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Statement by Commissioner Lee on Proposed Amendments Related to Proxy Voting Advice

Posted by Allison Herren Lee, U.S. Securities and Exchange Commission, on Thursday, November 18, 2021
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Statement by Commissioner Peirce on Universal Proxy

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on Thursday, November 18, 2021
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Statement by Commissioner Crenshaw on Universal Proxy

Posted by Caroline A. Crenshaw, U.S. Securities and Exchange Commission, on Thursday, November 18, 2021
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Statement by Commissioner Crenshaw on Universal Proxy

Posted by Caroline A. Crenshaw, U.S. Securities and Exchange Commission, on
Thursday, November 18, 2021
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Caroline A. Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Congratulations to the rulemaking team from the Division of Corporation Finance, as well as the staff within the Division of Economic and Risk Analysis and the Office of the General Counsel. This rulemaking has been several years in the making, [1] and I am glad that we are here today to finalize it.

The reality of modern board of director elections is that few shareholders attend a corporation’s annual meeting in-person to vote. [2] The ramifications of this are meaningful. Proxy voters in contested Board of Directors elections are usually unable to choose a mix of dissident and management nominees. [3] By contrast, those who vote in person, can.

The amendments before us serve a simple and important purpose: to ensure that shareholders can, by proxy, cast votes for a mix of management’s slate of director candidates and a dissident’s slate of director candidates in contested elections. Just as any shareholder who casts their vote in-person at the shareholder’s annual meeting is able to do.

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Statement by Commissioner Peirce on Universal Proxy

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Thursday, November 18, 2021
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Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

I support universal proxy, but not today’s version of universal proxy.

Shareholders voting by proxy should be able to split their vote among company and dissident nominees. Allowing shareholders a straightforward way of choosing a mixed slate through a universal proxy card can facilitate sensible changes to board composition. Universal proxy makes sense for both operating companies and investment companies. This particular universal proxy rule, however, may facilitate changes to the company that advance special interests rather than enhancing corporate value by serving as a tool for frivolous, as well as serious, activists. I might have been able to support the rule if I felt we had explored thoroughly the potential that the rule could afford activists without a demonstrated commitment to the company an opportunity to meddle in the company’s affairs. I do not believe we have done this work so I cannot support the rule.

The price of entry onto the company’s proxy card under this rule is low. Aside from requiring the dissident to list the company’s nominees on its proxy card and satisfy notice and filing requirements, the rule’s only gating requirement is that the dissident state an intention to solicit 67 percent of the voting power of the shares entitled to vote at the meeting and alert the company if its intentions change. While a 67 percent threshold is an improvement from the 50 percent threshold in the proposal, even the new threshold is easy to meet or ignore. Indeed, most dissidents already meet it. [1] Moreover, because the rule focuses on voting power rather than shareholder accounts, dissidents will often be able to meet the threshold by soliciting a small number of institutional shareholders, while ignoring small shareholders. The solicitation of large shareholders is not very burdensome given that the rule permits the use of notice-and-access solicitation; sending a postcard with a website link to proxy materials will suffice. The rule also lacks a clear enforcement mechanism for a dissident that fails to carry through on its solicitation intentions.

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Statement by Commissioner Lee on Proposed Amendments Related to Proxy Voting Advice

Posted by Allison Herren Lee, U.S. Securities and Exchange Commission, on
Thursday, November 18, 2021
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Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Proxy advisors play a unique and important role in helping shareholders vote to protect their investments and ensure their interests are being served. It is therefore important that our rules do not interfere with the independence of proxy voting advice, introduce unnecessary cost and complexity into an already compressed proxy voting process, or otherwise burden the free and full exercise of shareholder voting rights. For this reason, I’m pleased that we are revisiting certain aspects of the amendments governing proxy voting advice adopted last year so that our rules are appropriately tailored to the needs of investors and other market participants.

Today’s proposal represents a targeted reappraisal of only certain aspects of those amendments that generated substantial concern, particularly among investors (the intended beneficiaries of the changes), that we didn’t get the balance right in last year’s final rules. Specifically, last year’s amendments included mechanisms to enhance management’s influence over proxy voting advice by effectively requiring that issuers be given access to and an opportunity to respond to such advice, and that proxy advisors separately notify their clients of those responses despite the fact that they are publicly filed. [1] Last year’s rules also amended a note to the proxy-related anti-fraud provisions to add examples of material misstatements or omissions related to proxy voting advice, creating uncertainty regarding the scope of liability for such advice. [2] These features of last year’s rules prompted considerable concern. [3] Today’s proposal responds to those concerns by proposing to eliminate the issuer access and response provisions, and clarify the scope of fraud liability for proxy advisors.

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Remarks by Commissioner Crenshaw Remarks at the PepsiCo-PwC CPE Conference

Posted by Caroline A. Crenshaw, U.S. Securities and Exchange Commission, on
Wednesday, November 17, 2021
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Caroline A. Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at the PepsiCo-PwC CPE Conference. The views expressed in the post are those of  Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Thank you for the kind introduction Kevin [Gould]. It’s a pleasure to be here today at the annual PepsiCo-PwC CPE conference, which I understand is a tradition going back 18 years now. I appreciate the opportunity to speak, and I look forward to answering your questions today.

It’s not often—even in this job—that I find myself speaking before such a large group of controllers, accountants and other finance professionals of public companies. And I welcome it because it means we can get a bit more technical and talk about financial reporting issues. I suspect many of you will not be surprised that Kevin and his team have shared with me that ESG is top of mind for this group. I understand there is an interest in hearing what ESG means to the SEC and what ESG regulations are on the horizon. It’s a big question, and spoiler alert—I cannot speak for the Commission and tell you what is to come. I have to caveat my statements today with the standard disclaimer that any views I express today are my own and do not reflect the views of my fellow Commissioners, the Commission or its staff. But I am an U.S. Army reservist, and the Soldier in me truly appreciates your commitment to readiness. So even though I cannot speak for the Commission, today I will discuss how I have been thinking about ESG in the public issuer context.

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The Rescue of Fannie Mae and Freddie Mac–Module F: Federal Reserve’s Large-Scale Asset Purchase (LSAP)

Posted by Rosalind Z. Wiggins (Yale), on
Wednesday, November 17, 2021
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Rosalind Z. Wiggins is Director of The Global Financial Crisis Project and Senior Editor at the Yale Program on Financial Stability, Yale School of Management. This post is based on a recent paper authored by Ms. Wiggins; Andrew Metrick, Janet L. Yellen Professor of Finance and Management at the Yale School of Management and the Director of the Yale Program on Financial Stability; and Yale Program on Financial Stability researchers Ben Henken, Adam Kulam, and Daniel Thompson.

In the Fall of 2008, the bursting of the US housing market and the subprime mortgage crisis that it spurred had sent shock waves throughout the financial system. For over a year, the Federal Reserve had been responding to tensions in the credit markets. Many markets had all but frozen in the wake of the unprecedented events of September—the government had taken the giant Fannie Mae and Freddie Mac into conservatorship to prevent their collapse and the collapse of the secondary mortgage market along with it, and the Fed had made one of its largest loans ever to the $ 1 trillion insurance company American International Group, to forestall it following in Lehman’s footsteps. Despite the intervening bankruptcy of the investment bank Lehman Brothers, the government and Fed had hoped that these extraordinary interventions would stabilize the system and keep credit flowing; but it wasn’t happening. The secondary mortgage markets continued to suffer high rates of default, causing mortgage lending to slow, and the value of mortgage-backed securities (MBS), widely held on the balance sheets of financial institutions, to plummet. Credit remained tight and rates remained high, especially mortgage and other long-term rates.

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Stockholder Nominees Barred For Noncompliance With “Clear Day” Advance Notice Bylaw

Posted by Andre G. Bouchard, Krishna Veeraraghavan, and Steven J. Williams, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Wednesday, November 17, 2021
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Andre G. Bouchard, Krishna Veeraraghavan, and Steven J. Williams are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss memorandum by Mr. Bouchard, Mr. Veeraraghavan, Mr. Williams, Scott A. Barshay, Jaren Janghorbani, and Laura C. Turano, and is part of the Delaware law series; links to other posts in the series are available here.

In Rosenbaum v. CytoDyn Inc., the Delaware Court of Chancery, in an opinion by Vice Chancellor Slights, upheld a board’s decision to exclude stockholder nominees from being considered at CytoDyn’s annual meeting based on deficiencies in the stockholders’ notice required by the company’s advance notice bylaw. The court found that the board had not engaged in any manipulative or inequitable conduct in rejecting the nominees. Even though the board waited almost one month before notifying the stockholders of deficiencies in their nomination notice, the court emphasized that the stockholders had not submitted their notice until close to the deadline, which left no time to fix the deficiencies, and that the bylaw did not in any event require the board to engage in an iterative process with the proponent to fix deficiencies.

Background

Plaintiff stockholders of CytoDyn provided advance notice of their nominations to CytoDyn’s board the day before the advance notice deadline in CytoDyn’s “commonplace” advance notice bylaw. One month after the deadline, the board sent a deficiency letter to the plaintiffs regarding the disclosures in their nomination notice. The deficiencies identified by the board included the plaintiffs’ failure to disclose (i) the identity of a limited liability company formed by one of the plaintiffs (who was also a nominee) to fund the proxy contest, as well as the limited liability company’s donors, and (ii) the plaintiffs’ support of an acquisition by CytoDyn that had been previously considered and rejected by the board, pursuant to which CytoDyn would acquire a company with ties to two of plaintiffs’ nominees and employ one of the nominees who also had patent disputes with CytoDyn. Plaintiffs attempted to address the deficiencies shortly after their receipt of the deficiency letter, but well after the advance notice deadline. Upon the continued rejection of their nominations by the CytoDyn board, the plaintiffs filed suit in the Court of Chancery, seeking an injunction requiring the board to place the plaintiffs’ nominees on the ballot for the CytoDyn annual meeting scheduled for October 2021. The court considered the matter after a trial on a paper record.

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